2017 Annual Report Financial Statements - Sage US

Directors’ report continued

Directors’ statement The Directors as at the date of this report, whose names and functions are listed in the Board of Directors on pages 64 to 65, confirm that:

– To the best of their knowledge, the Group’s financial statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group

– To the best of their knowledge, the Directors’ report and the Strategic report include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces

Each Director as at the date of this report further confirms that:

– So far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware

– The Director has taken all the steps that he or she ought to have taken as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information

This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.

In addition, the Directors as at the date of this report consider that the Annual Report & Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s and the Group’s position and performance, business model and strategy.

By Order of the Board

Vicki Bradin Company Secretary

21 November 2017

The Sage Group plc Company number 2231246

Contents Group financial statements

Independent auditor’s report to the members of The Sage Group plc 110

Group financial statements Consolidated income statement 119Consolidated statement of comprehensive income 120Consolidated balance sheet 121Consolidated statement of changes in equity 122Consolidated statement of cash flows 123

Notes to the Group financial statements Supplementary notes to the Group financial statements.

1. Basis of preparation and critical accounting estimates and judgements 124

Results for the year2. Segment information 1283. Profit before income tax 1334. Income tax expense 1385. Earnings per share 139

Operating assets and liabilities6. Intangible assets 1427. Property, plant and equipment 1468. Investment in an associate 1489. Working capital 14810. Provisions 15111. Post-employment benefits 15212. Deferred income tax 154

Net debt and capital structure13. Cash flow and net debt 15714. Financial instruments 16015. Equity 163

Other notes16. Acquisitions and disposals 16917. Related party transactions 17318. Group undertakings 174

109The Sage Group plc | Annual Report & Accounts 2017

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Independent auditor’s report to the members of The Sage Group plc

OpinionIn our opinion:

– The Sage Group plc’s Group financial statements and parent Company financial statements (the “financial statements”) give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 30 September 2017 and of the Group’s profit for the year then ended;

– the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; – the parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting

Practice; and – the financial statements have been prepared in accordance with the requirements of the Companies Act 2006, and, as regards the Group financial

statements, Article 4 of the IAS Regulation.

We have audited the financial statements of The Sage Group plc which comprise:Group Parent companyConsolidated balance sheet as at 30 September 2017 Company balance sheet as at 30 September 2017Consolidated income statement for the year then ended Company statement of changes in equity for the year then endedConsolidated statement of comprehensive income for the year then ended Company accounting policiesConsolidated statement of changes in equity for the year then ended Related notes 1 to 7 to the financial statementsConsolidated statement of cash flows for the year then endedRelated notes 1 to 18 to the financial statements, including a summary of significant accounting policies

The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent Company financial statements is applicable law and United Kingdom Accounting Standards, including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (United Kingdom Generally Accepted Accounting Practice).

Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below. We are independent of the Group and parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Conclusions relating to principal risks, going concern and viability statementWe have nothing to report in respect of the following information in the Annual Report, in relation to which the ISAs(UK) require us to report to you whether we have anything material to add or draw attention to:

– the disclosures in the Annual Report set out on page 52 that describe the principal risks and explain how they are being managed or mitigated; – the Directors’ confirmation set out on page 52 in the Annual Report that they have carried out a robust assessment of the principal risks facing the

entity, including those that would threaten its business model, future performance, solvency or liquidity; – the Directors’ statement set out on page 104 in the financial statements about whether they considered it appropriate to adopt the going concern

basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least 12 months from the date of approval of the financial statements;

– whether the Directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or

– the Directors’ explanation set out on page 58 in the Annual Report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

The Sage Group plc | Annual Report & Accounts 2017110

Overview of our audit approachKey audit matters – Revenue recognition

– Intacct acquisition – provisional valuation of acquired intangible assets (NEW in 2017) – Carrying value of goodwill – Classification of restructuring costs as non-recurring, as a result of the Group’s business transformation

Audit scope – We performed an audit of the complete financial information of six components and audit procedures on specific balances for a further five components.

– The components where we performed full or specific audit procedures accounted for 98% of adjusted Profit before tax * for both continuing and discontinued operations and 89% of Revenue.

Materiality – Overall Group materiality of £21.4m which represents 5% of adjusted Profit before tax* for both continuing and discontinued operations.

* Profit before tax for continuing and discontinued operations adjusted for non-recurring items as defined in the ‘Our application of materiality’ section of this report

Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.

Risk Our response to the riskKey observations communicated to the Audit and Risk Committee

Revenue recognition Refer to the Audit and Risk Committee Report (page 78); and notes 2.1 and 3.1 of the Group financial statements

The Group has reported continuing revenues of £1,715m (2016: £1,439m). We focused on the recognition of revenue as the timing of revenue recognition and its presentation in the income statement are subject to inherent complexities in the software industry.

We identified three specific risks of fraud and error in respect of improper revenue recognition given the nature of the Group’s products and services as follows:

– Inappropriate cut-off and deferral of revenue;

– Inappropriate accounting for complex one-off arrangements; changes to existing products and new products or services; and

– Inappropriate allocation of revenue between the components of bundled products.

There is no change in the risk profile in the current year.

At each full and specific scope audit location with significant revenue streams:

– We performed walkthroughs of each significant class of revenue transactions and assessed the design effectiveness of key controls. For three components we tested the operating effectiveness of controls.

– For products and services where the risks and rewards are transferred over a period of time, we tested a sample of transactions to ensure that the amount of revenue was accurately calculated based on the state of completion of the contract and recognised in the appropriate period.

– Our procedures in relation to inappropriate accounting for complex one-off arrangements, changes to existing products and new products or services ensured that the policies adopted were appropriate and in accordance with the requirements of IFRS.

– For bundled products, we tested on a sample basis, that (1) the calculation of the fair value attributed to each element of the bundle was reasonable, and (2) that the allocation of any discount was consistent with the relative fair value of each element of the bundle.

– We performed other substantive, transactional testing and data analysis procedures to validate the recognition of revenue throughout the year. Where practicable, at component level we performed testing over full populations of transactions using data analysis.

– We performed testing of journal entries to identify any instances of revenue being recorded via journals and, where relevant, to establish whether a service had been provided or a sale had occurred in the financial year to support the revenue recognised.

We also considered the adequacy of the Group’s disclosure of the accounting policies for revenue recognition in notes 1 and 3.1 respectively.

At each full and specific scope audit location with significant revenue streams (eight components) we performed the audit procedures set out above which covered 89% of the Group’s revenue. We also performed review procedures in seven locations, which covered a further 8% of the Group’s revenue.

Based on the procedures performed, we did not identify any evidence of material misstatement in the revenue recognised in the year nor in amounts deferred at 30 September 2017.


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Independent auditor’s report to the members of The Sage Group plc continued


Intacct acquisition - provisional valuation of acquired intangible assets (NEW in 2017)Refer to the Audit and Risk Committee Report (page 79); and note 16.1 of the Group financial statements

On 3 August 2017, the Group acquired Intacct Corporation for £627m.

We focused on this area given the Group has recognised intangible assets relating to customer relationships (£97m), technology (£44m) and Brand (£1m) as part of the provisional purchase price allocation. Significant judgement is involved in assessing the preliminary fair values of intangible assets. These valuations directly impact the amount of goodwill recognised on acquisition and are based on valuation techniques built, in part, on assumptions around the future performance of the business.

The purchase price allocation exercise will be finalised in the year ending 30 September 2018.

We walked through the controls over the valuation of the acquired intangible assets and understood management’s process to comply with IFRS 3 Business Combinations and IFRS 13 Fair Value Measurement.

With involvement of an EY business valuation specialist, we

(1) assessed the competence, capabilities and objectivity of management’s specialists; and

(2) evaluated and concluded on the results of management’s and its specialist’s procedures to determine the preliminary fair value of the intangible assets acquired. This included:

– evaluating the completeness and existence of intangible assets recognised; – assessment of the valuation methodologies applied; – assessment of the key assumptions made by management, such as customer

churn, royalty rates and discount rates, compared to our independently calculated range;

– benchmarking the assumptions used with historic Sage acquisitions and other transactions in the sector; and

– performing sensitivity analysis to understand the extent to which changes in key assumptions may give rise to a materially different valuation for the intangible asset.

In addition, we assessed the prospective financial information utilised in the valuation models based on the viewpoint of a market participant as defined by IFRS 13 Fair Value Measurement. This included evaluating the historical accuracy of forecasting, current performance and adjustments made to pre acquisition/due diligence forecast numbers.

We considered the appropriateness of the related disclosures in note 16.1 in the Group financial statements with the requirements of IFRS 3.

Audit procedures on the provisional valuation of the acquired intangible assets were performed by the Primary audit team.

The provisional valuation of acquired intangible assets is appropriate.

The required IFRS 3 disclosures for business combinations, including the provisional nature of the fair value of the assets and liabilities acquired, are disclosed in note 16.1 of the consolidated financial statements.



Carrying value of goodwillRefer to the Audit and Risk Committee Report (page 78); and notes 1 and 6.1 of the Group financial statements

We focused on this area due the size of the goodwill balance £2,023m (2016: £1,659m) and because the Directors’ assessment of the ‘value in use’ of the Group’s Cash Generating Units (“CGUs”) involves judgement about the future performance of the business and the discount rates applied to future cash flow forecasts.

In the year, goodwill of £523m was recognised in respect of Intacct and we have undertaken separate procedures in respect of this goodwill balance as part of our work on the provisional purchase price allocation.


We challenged management’s assumptions used in its models for assessing the recoverability of the carrying value of goodwill. We focused on the appropriateness of CGU identification, methodology applied to estimate recoverable values, discount rates, and forecast cash flows. Specifically:

– We have validated that the CGUs identified, including the combination of Malaysia and Singapore into a single Asia CGU, are the lowest level at which management monitors goodwill.

– We tested the methodology applied in the value in use calculation as compared to the requirements of IAS 36, Impairment of Assets, and the mathematical accuracy of management’s model.

– We obtained an understanding of, and assessed the basis for, key underlying assumptions for the 2018 budget.

– We have validated that the cash flow forecasts used in the valuation are consistent with information approved by the Board and have evaluated the appropriateness of the use of these forecasts in light of the historical accuracy of management’s forecasts.

– For the five CGUs with the largest goodwill balances or the lowest headroom, we challenged management on its cash flow forecasts and the implied growth rates for 2018 and beyond by considering evidence available to support these assumptions and their consistency with findings from other areas of our audit.

– The discount rates and long-term growth rates applied within the model were assessed by an EY business valuation specialist, including comparison to economic and industry forecasts where appropriate.

– For all CGUs, we performed sensitivity analyses by stress testing key assumptions in the model with downside scenarios to understand the parameters that, should they arise, could lead to a different conclusion in respect of the carrying value of goodwill.

– In respect of goodwill relating to Intacct, we evaluated whether there are any indicators that the fair value of the business is lower than the consideration paid to acquire the business. We compared the post-acquisition performance of Intacct to expectations set by management at the time of the acquisition.

We considered the appropriateness of the related disclosures provided in note 6.1 in the Group financial statements.

The entire goodwill balance was subject to full scope audit procedures by the Primary audit team with assistance from certain component audit teams on procedures over forecast financial information where relevant.

Based on the results of our work, we agree with management’s conclusion that no impairment of goodwill is required in the current year. We agree with management that no reasonably possibly change in assumptions would result in a material impairment in any Cash Generating Unit and hence no additional sensitivity disclosures are required in note 6.1 of the Group financial statements.


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Classification of restructuring costs as non-recurring, as a result of the Group’s business transformationRefer to the Audit and Risk Committee Report (page 79); and note 3.6 of the Group financial statements

We focused on this area as costs of £73m have been classified as non-recurring on the basis that they relate to the Group’s business transformation and consequently are excluded from the Group’s underlying results. As such, the audit team focused its procedures on the following risks:

– Inappropriate classification of costs as non-recurring;

– Inconsistent treatment of non-recurring items from year to year; and

– Inappropriate quantification of non-recurring items and recognition of amounts in an incorrect accounting period.


– We assessed whether the constituent costs are recorded in line with the Group’s policy as summarised in note 3.6 and that the policy has been applied consistently with prior years.

– We tested a sample of costs classified as non-recurring to verify that they are directly attributable to the business transformation and are recorded at the correct amount and in the appropriate period.

– We considered the level of transparency of the disclosures provided in note 3.6 in the Group financial statements with reference to both the Financial Reporting Council’s (‘FRC’) 2013 guidance to directors on the use of exceptional items and the key messages reported in the FRC’s Corporate Reporting Thematic Review on Alternative Performance Measures (APMs) published in November 2017.

Component teams at eight locations performed audit procedures on people related reorganisation costs, external consultant spend and on certain net property exit costs. The Primary audit team performed audit procedures on the remaining business transformation costs.

Based on the procedures performed, we did not identify any evidence of material misstatement of business transformations costs. The classification of these costs as non-recurring was in accordance with the Group’s disclosed accounting policy and reflects that they relate to a publically announced global business transformation, with the amounts and the two-year expense timeline reflective of the scale of the transformation activities, and have been consistently disclosed in the Group financial statements.

In the prior year, the key audit matter included within our auditor’s report in relation to non-recurring restructuring costs as a result of the Group’s business transformation, also included a risk in relation to changes in finance systems and processes as a result of the commencement of the Group’s finance transformation. This included the implementation of the Group’s X3 ERP system for certain processes in the UK and South Africa and the establishment of Financial Shared Services Centres (“FSSC”) in those locations. In the current year, the operations of the FSSCs continued to stabilise and the migration of France, Portugal and Belgium on to X3 and into the FSSC in the UK for certain processes was not assessed by the team to have the greatest effect on the overall audit strategy, the allocation of resources in the audit, and directing the efforts of the engagement team.

An overview of the scope of our audit Tailoring the scopeOur assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the Group and effectiveness of Group-wide controls, changes in the business environment and other factors such as prior year external audit findings and recent Internal Audit results when assessing the level of work to be performed at each entity.

In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, of the 24 reporting components of the Group, we selected 11 components covering entities within the United Kingdom and Ireland, France, North America, Spain, Germany, Brazil and South Africa which represent the principal business units within the Group.

Of the 11 components selected, we performed an audit of the complete financial information of six components (“full scope components”) which were selected based on their size or risk characteristics. For the remaining five components (“specific scope components”), we performed audit procedures on specific accounts within that component that we considered had the potential for the greatest impact on the significant accounts in the financial statements either because of the size of these accounts or their risk profile. For the remaining 13 components, audit procedures were undertaken as set out in note 4 below to respond to any potential risks of material misstatement to the Group financial statements.


2017 2016

Reporting components Number

% Group adjusted Profit

before tax*% Group Revenue See note Number

% Group adjusted Profit

before tax% Group Revenue

Full scope 6 68% 59% 1,2 6 68% 58%Specific scope 5 30% 30% 2,3 6 31% 32%Full and specific scope coverage 11 98% 89% 12 99% 90%Remaining components 13 2% 11% 4 34 1% 10%Total Reporting components 24 100% 100% 46 100% 100%

* Profit before tax for continuing and discontinued operations adjusted for non-recurring items as defined in the ‘Our application of materiality’ section of this reportNotes1. Three of the six full scope components relate to the parent Company and other corporate entities whose activities include the Group’s treasury management and consolidation

adjustments. The Group audit risks in relation to both Intacct acquisition – provisional valuation of acquired intangible assets and the carrying value of goodwill were subject to audit procedures by the Primary audit team on the entire balances with assistance from certain component audit teams where relevant.

2. The Group audit risk in relation to revenue recognition was subject to full audit procedures at each of the full and specific scope locations with significant revenue streams.

3. The audit scope of these components may not have included testing of all significant accounts of the component but will have contributed to the coverage of significant accounts selected for testing by the Primary audit team.

4. The remaining 13 components contributed a net 2% of adjusted Profit before tax* and the contribution of these components ranged from 4% to (5)% of the Group’s adjusted Profit before tax*. We instructed a component team to undertake specified procedures over certain cash balances at one location. For seven components, including Australia, Singapore and Sage People, we performed review scope procedures. For the remaining components, the Primary audit team performed other procedures, including analytical review procedures and testing of consolidation journals, intercompany eliminations and foreign currency translation recalculations to respond to any potential risks of material misstatement to the Group financial statements.

Changes from the prior year The change in the total number of reporting components from 46 to 24 reflects the integration of 25 legal entities, previously reported as separate components, into the Corporate Centre component. There is no change from prior year in the scope of the audit work performed. One specific scope reporting location in 2016 is now reported within the UK full scope reporting component.

Involvement with component teams In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the components by us, as the Primary audit engagement team, or by component auditors from other EY global network firms operating under our instruction. Of the six full scope components, audit procedures were performed on three of these directly by the Primary audit team and three by component audit teams. For the five specific scope components, where the work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole.

The Primary audit team continued to follow a programme of planned visits that has been designed to ensure that the Senior Statutory Auditor, or another group audit partner, would visit all full and selected specific scope audit locations. During the current year’s audit cycle, visits were undertaken at least once by the Primary audit team to the component teams in the UK, France, Brazil, North America, and South Africa. These visits involved discussing the audit approach with the component team and any issues arising from their work, reviewing key audit working papers on the Group risk areas, and meeting with local management to discuss the component’s business performance and matters relating to the local finance organisation including the internal financial control environment. EY San Francisco was the existing auditor of Intacct Corporation prior to its acquisition by Sage. The Primary audit team instructed our EY component team at that location to undertake specified audit procedures on the opening balance sheet at 3 August 2017 and review procedures over the two-month post acquisition trading performance of the business to year end. The Primary audit team interacted regularly with the component teams where appropriate during various stages of the audit, reviewed key working papers and were responsible for the scope and direction of the audit process. This, together with the additional procedures performed at Group level, gave us appropriate evidence for our opinion on the Group financial statements.


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Our application of materiality We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion.

During the course of our audit, we reassessed initial materiality and the only change in the final materiality from our original assessment at planning was to reflect the actual reported performance of the Group in the year.

Performance materialityThe application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.

On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that performance materiality was 50% (2016: 50%) of our planning materiality, namely £10.7m (2016: £9.5m). Our performance materiality percentage has remained at 50% to reflect the risk associated with the Group-wide business transformation, and specifically the ongoing changes across the finance organisation that commenced during the prior year, and which included in 2017 for France, Portugal and Belgium the implementation of their respective X3 ERP system for certain processes and the stabilisation of the Financial Shared Services Centres established in both the UK and South Africa during 2016.

Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was £1.1m to £6.0m (2016: £0.9m to £5.2m).

Reporting thresholdAn amount below which identified misstatements are considered as being clearly trivial.

We agreed with the Audit and Risk Committee that we would report to them all uncorrected audit differences in excess of £1.1m (2016: £1.0m), which is set at 5% of materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.

We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion.

Other information The other information comprises the information included in the Annual Report as set out on the Financial highlights page and on pages 2-108, other than the financial statements and our auditor’s report thereon. The Directors are responsible for the other information.

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon.

Starting basis

Continuing operations profit before tax of £342m

Discontinued operations profit before tax of £29m

Total profit before tax of £371m

Adjustments

Adjustments to exclude non-recurring items:

– Business transformation costs of £73m – Gain on disposal of subsidiary of £3m – Gain on remeasurement of existing

investment in associate of £13m

Materiality – Totals £428m – Materiality of £21.4m

(5% of materiality basis)

MaterialityThe magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.

We determined materiality for the Group to be £ 21.4 million (2016: £19.1 million), which is 5% (2016: 5%) of Profit before tax for both continuing and discontinued operations adjusted for non-recurring items reported by the Group. We believe that Profit before tax for both continuing and discontinued operations adjusted for non-recurring items provides us with the most relevant performance measure to the stakeholders of the entity. Non-recurring items are set out in note 3.6 of the Group’s financial statements.


In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.

We have nothing to report in this regard.

In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions:

– Fair, balanced and understandable set out on page 108 – the statement given by the Directors that they consider the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or

– Audit and Risk Committee reporting set out on page 76 – the section describing the work of the Audit and Risk Committee does not appropriately address matters communicated by us to the Audit and Risk Committee; or

– Directors’ statement of compliance with the UK Corporate Governance Code set out on page 63 – the parts of the Directors’ statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.

Opinions on other matters prescribed by the Companies Act 2006In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

– the information given in the Strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

– the Strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements.

Matters on which we are required to report by exceptionIn the light of the knowledge and understanding of the Group and the parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic report or the Directors’ report.

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:

– adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

– the parent Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or

– certain disclosures of Directors’ remuneration specified by law are not made; or – we have not received all the information and explanations we require for our audit.

Responsibilities of DirectorsAs explained more fully in the Directors’ responsibilities statement set out on page 107, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Directors are responsible for assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.


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Explanation as to what extent the audit was considered capable of detecting irregularities, including fraudThe objectives of our audit, in respect to fraud, are: to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management.

Our approach was as follows: – We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most significant

frameworks which are directly relevant to specific assertions in the financial statements are those that relate to the reporting framework (IFRS, FRS 102, the Companies Act 2006 and UK Corporate Governance Code) and the relevant tax compliance regulations in the jurisdictions in which the Group operates.

– We understood how the Group is complying with those legal and regulatory frameworks by making enquiries of management, Internal Audit, those responsible for legal and compliance procedures and the Company Secretary. We corroborated our enquiries through our review of Board minutes and papers provided to the Audit and Risk Committee.

– We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur, by meeting with management from various parts of the business to understand where it considered there was susceptibility to fraud. We also considered performance targets and their propensity to influence on efforts made by management to manage earnings. We considered the programmes and controls that the Group has established to address risks identified, or that otherwise prevent, deter and detect fraud; and how senior management monitors those programmes and controls. Where the risk was considered to be higher, we performed audit procedures to address each identified fraud risk. These procedures included testing manual journals and were designed to provide reasonable assurance that the financial statements were free from fraud or error.

Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations identified in the paragraphs above. Our procedures involved: journal entry testing, with a focus on manual consolidation journals and journals indicating large or unusual transactions based on our understanding of the business; enquiries of Legal Counsel, Group management, Internal Audit, country management at all full and specific scope management; and focused testing, as referred to in the key audit matters section above. In addition, we completed procedures to conclude on the compliance of the disclosures in the Annual Report and Accounts with the requirements of the relevant accounting standards, UK legislation and the UK Corporate Governance Code 2016.

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

Other matters we are required to address Following the recommendation of the Audit and Risk Committee, we were appointed as auditor by the shareholders and signed an engagement letter on 19 October 2017. We were appointed by the Company at the AGM on 28 February 2017 to audit the financial statements for the year ended 30 September 2017 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments is three years, covering the years ended 30 September 2015, 30 September 2016 and 30 September 2017.

The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent Company and we remain independent of the Group and the Parent company in conducting the audit.

The audit opinion is consistent with the additional report to the Audit and Risk Committee.

Alison Duncan (Senior statutory auditor)for and on behalf of Ernst & Young LLP, Statutory Auditor London 21 November 2017

Notes:1. The maintenance and integrity of The Sage Group plc website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of

these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.



Consolidated income statement For the year ended 30 September 2017

The Sage Group plc | Annual Report & Accounts 2017 119

Note

Underlying2017

£m

Adjustments(note 3.6)

2017£m

Statutory 2017

£m

Underlying as reported *

2016Restated

£m

Adjustments(note 3.6)

2016Restated

£m

Statutory2016

Restated£m

Revenue 2.1, 3.1 1,720 (5) 1,715 1,439 – 1,439Cost of sales (114) – (114) (91) – (91)Gross profit 1,606 (5) 1,601 1,348 – 1,348Selling and administrative expenses (1,139) (114) (1,253) (955) (126) (1,081)Operating profit 2.2, 3.2, 3.3, 3.6 467 (119) 348 393 (126) 267Share of loss of an associate 8 – (1) (1) – (1) (1)Gain on remeasurement of existing investment in an associate 3.6 – 13

13 – – –

Finance income 3.5 2 8 10 2 3 5Finance costs 3.5 (27) (1) (28) (23) (6) (29)Profit before income tax 442 (100) 342 372 (130) 242Income tax expense 4 (115) 30 (85) (92) 38 (54)Profit for the year – continuing operations 327 (70) 257 280 (92) 188Profit on discontinued operations 16.3 18 25 43 20 – 20Profit for the year 345 (45) 300 300 (92) 208 Profit attributable to: Owners of the parent 345 (45) 300 300 (92) 208 Earnings per share attributable to the owners of the parent (pence) From continuing operations – Basic 5 30.28p 23.86p 25.90p 17.43p– Diluted 5 30.18p 23.78p 25.75p 17.33pFrom continuing and discontinued operations – Basic 5 31.90p 27.80p 27.84p 19.28p– Diluted 5 31.79p 27.71p 27.67p 19.16p

Note:

* Underlying as reported is at 2016 reported exchange rates.

Consolidated income statementFor the year ended 30 September 2017


Strategic reportG


ents

Consolidated balance sheet As at 30 September 2017


Note2017

£m 2016

£m

Non-current assets Goodwill 6.1 2,023 1,659Other intangible assets 6.2 274 109Property, plant and equipment 7 133 123Fixed asset investment 16.3 15 –Investment in an associate 8 – 9Other financial assets 2 3Deferred income tax assets 12 61 58 2,508 1,961Current assets Inventories 9.1 3 2Trade and other receivables 9.2 466 420Current income tax asset 14 8Cash and cash equivalents (excluding bank overdrafts) 13.3 231 264Assets classified as held for sale 16.4 1 1 715 695 Total assets 3,223 2,656 Current liabilities Trade and other payables 9.3 (337) (350)Current income tax liabilities (18) (21)Borrowings 13.4 (55) (43)Provisions 10 (37) (38)Deferred income 3.1 (585) (536)Liabilities classified as held for sale 16.4 (1) – (1,033) (988) Non-current liabilities Borrowings 13.4 (914) (535)Post-employment benefits 11 (22) (25)Deferred income tax liabilities 12 (46) (13)Provisions 10 (31) (29)Trade and other payables (5) (8)Deferred income 3.1 (4) (5) (1,022) (615) Total liabilities (2,055) (1,603)Net assets 1,168 1,053 Equity attributable to owners of the parent Ordinary shares 15.1 12 12Share premium 548 544Other reserves 15.3 131 187Retained earnings 477 310 Total equity 1,168 1,053

The consolidated financial statements on pages 119 to 176 were approved by the Board of Directors on 21 November 2017 and are signed on their behalf by:

S Hare Chief Financial Officer

Consolidated statement of comprehensive income For the year ended 30 September 2017

120 The Sage Group plc | Annual Report & Accounts 2017

Note 2017

£m2016

£m

Profit for the year 300 208Other comprehensive income/(expense): Items that will not be reclassified to profit or loss: Actuarial gain/(loss) on post-employment benefit obligations 11, 15.4 4 (2)Deferred tax charge on actuarial gain/(loss) on post-employment benefit obligations 4, 15.4 (1) – 3 (2)Items that may be reclassified to profit or loss: Deferred tax credit on foreign currency movements 4, 15.3 2 3Exchange differences on translating foreign operations 15.3 (26) 117Exchange differences recycled through income statement on sale of foreign operations 15.3, 16.3 (32) – (56) 120 Other comprehensive (expense)/income for the year, net of tax (53) 118 Total comprehensive income for the year 247 326 Total comprehensive income for the year attributable to: Owners of the parent 247 326

Consolidated statement of comprehensive incomeFor the year ended 30 September 2017


Consolidated balance sheet As at 30 September 2017


Note2017

£m 2016

£m

Non-current assets Goodwill 6.1 2,023 1,659Other intangible assets 6.2 274 109Property, plant and equipment 7 133 123Fixed asset investment 16.3 15 –Investment in an associate 8 – 9Other financial assets 2 3Deferred income tax assets 12 61 58 2,508 1,961Current assets Inventories 9.1 3 2Trade and other receivables 9.2 466 420Current income tax asset 14 8Cash and cash equivalents (excluding bank overdrafts) 13.3 231 264Assets classified as held for sale 16.4 1 1 715 695 Total assets 3,223 2,656 Current liabilities Trade and other payables 9.3 (337) (350)Current income tax liabilities (18) (21)Borrowings 13.4 (55) (43)Provisions 10 (37) (38)Deferred income 3.1 (585) (536)Liabilities classified as held for sale 16.4 (1) – (1,033) (988) Non-current liabilities Borrowings 13.4 (914) (535)Post-employment benefits 11 (22) (25)Deferred income tax liabilities 12 (46) (13)Provisions 10 (31) (29)Trade and other payables (5) (8)Deferred income 3.1 (4) (5) (1,022) (615) Total liabilities (2,055) (1,603)Net assets 1,168 1,053 Equity attributable to owners of the parent Ordinary shares 15.1 12 12Share premium 548 544Other reserves 15.3 131 187Retained earnings 477 310 Total equity 1,168 1,053

The consolidated financial statements on pages 119 to 176 were approved by the Board of Directors on 21 November 2017 and are signed on their behalf by:


Consolidated statement of comprehensive income For the year ended 30 September 2017


Note 2017

£m2016

£m

Profit for the year 300 208Other comprehensive income/(expense): Items that will not be reclassified to profit or loss: Actuarial gain/(loss) on post-employment benefit obligations 11, 15.4 4 (2)Deferred tax charge on actuarial gain/(loss) on post-employment benefit obligations 4, 15.4 (1) – 3 (2)Items that may be reclassified to profit or loss: Deferred tax credit on foreign currency movements 4, 15.3 2 3Exchange differences on translating foreign operations 15.3 (26) 117Exchange differences recycled through income statement on sale of foreign operations 15.3, 16.3 (32) – (56) 120 Other comprehensive (expense)/income for the year, net of tax (53) 118 Total comprehensive income for the year 247 326 Total comprehensive income for the year attributable to: Owners of the parent 247 326

Consolidated balance sheetAs at 30 September 2017


Strategic reportG


ents

Consolidated statement of changes in equity For the year ended 30 September 2017


Attributable to owners of the parent

Note

Ordinary shares

£m

Share premium

£m

Other reserves

£m

Retained earnings

£m

Total equity

£m

At 1 October 2016 12 544 187 310 1,053Profit for the year – – – 300 300Other comprehensive income/(expense): Exchange differences on translating foreign operations 15.3 – – (26) – (26)Exchange differences recycled through income statement on sale of foreign operations 15.3 –

–

(32) – (32)

Deferred tax credit on foreign currency movements 4, 15.3 – – 2 – 2Actuarial gain on post-employment benefit obligations 11, 15.4 – – – 4 4Deferred tax charge on actuarial loss on post-employment obligations 4, 15.4 – – – (1) (1)Total comprehensive income for the year ended 30 September 2017 – – (56) 303 247Transactions with owners: Employee share option scheme: – Proceeds from shares issued – 4 – – 4– Value of employee services, net of deferred tax 15.4 – – – 9 9– Value of employee services on acquisition 16.1 – – – 21 21Purchase of treasury shares 15.4 – – – (9) (9)Dividends paid to owners of the parent 15.5 – – – (157) (157)Total transactions with owners for the year ended 30 September 2017 – 4 – (136) (132)At 30 September 2017 12 548 131 477 1,168



Note

Ordinary shares

£m

Share premium

£m

Other reserves

£m

Retained earnings

£m

Total equity

£m

At 1 October 2015 12 541 67 242 862Profit for the year – – – 208 208Other comprehensive income/(expense): Exchange differences on translating foreign operations 15.3 – – 117 – 117Deferred tax credit on foreign currency movements 4, 15.3 – – 3 – 3Actuarial loss on post-employment benefit obligations 11, 15.4 – – – (2) (2)Deferred tax credit on actuarial loss on post-employment obligations 4. 15.4 – – – – –Total comprehensive income for the year ended 30 September 2016 – – 120 206 326Transactions with owners: Employee share option scheme: – Proceeds from shares issued – 3 – – 3– Value of employee services, net of deferred tax 15.4 – – – 9 9Purchase of treasury shares 15.4 – – – (2) (2)Dividends paid to owners of the parent 15.5 – – – (145) (145)Total transactions with owners for the year ended 30 September 2016 – 3 – (138) (135)At 30 September 2016 12 544 187 310 1,053

Consolidated statement of changes in equityFor the year ended 30 September 2017


Consolidated statement of cash flows For the year ended 30 September 2017


Note2017

£m

2016Restated

£m

Cash flows from operating activities Cash generated from continuing operations 13.1 403 360Interest paid (24) (21)Income tax paid (102) (92)Operating cash flows generated from discontinued operations 16.3 25 38Net cash generated from operating activities 302 285 Cash flows from investing activities Acquisitions of subsidiaries, net of cash acquired 16.1 (693) (6)Proceeds on settlement of debt investment 7 –Purchases of intangible assets 6.2 (22) (8)Purchases of property, plant and equipment 7 (30) (23)Purchase of investment in an associate – (10)Interest received 3.5 2 2Disposal of discontinued operations 16.3 158 –Net cash used in investing activities (578) (45) Cash flows from financing activities Proceeds from issuance of ordinary shares 4 3Purchase of treasury shares (9) (2)Finance lease principal payments – (1)Proceeds from borrowings 662 69Repayments of borrowings (275) (189)Movements in cash held on behalf of customers 5 (4)Borrowing costs (1) (2)Dividends paid to owners of the parent 15.5 (157) (145)Financing cash flows generated from discontinued operations 16.3 4 (8)Net cash generated from/(used in) financing activities 233 (279) Net decrease in cash, cash equivalents and bank overdrafts (before exchange rate movement) (43) (39)Effects of exchange rate movement 13.2 (4) 36Net decrease in cash, cash equivalents and bank overdrafts (47) (3)Cash, cash equivalents and bank overdrafts at 1 October 13.2 260 263Cash, cash equivalents and bank overdrafts at 30 September 13.2 213 260




Note

Ordinary shares

£m

Share premium

£m

Other reserves

£m

Retained earnings

£m

Total equity

£m

At 1 October 2016 12 544 187 310 1,053Profit for the year – – – 300 300Other comprehensive income/(expense): Exchange differences on translating foreign operations 15.3 – – (26) – (26)Exchange differences recycled through income statement on sale of foreign operations 15.3 –

–

(32) – (32)

Deferred tax credit on foreign currency movements 4, 15.3 – – 2 – 2Actuarial gain on post-employment benefit obligations 11, 15.4 – – – 4 4Deferred tax charge on actuarial loss on post-employment obligations 4, 15.4 – – – (1) (1)Total comprehensive income for the year ended 30 September 2017 – – (56) 303 247Transactions with owners: Employee share option scheme: – Proceeds from shares issued – 4 – – 4– Value of employee services, net of deferred tax 15.4 – – – 9 9– Value of employee services on acquisition 16.1 – – – 21 21Purchase of treasury shares 15.4 – – – (9) (9)Dividends paid to owners of the parent 15.5 – – – (157) (157)Total transactions with owners for the year ended 30 September 2017 – 4 – (136) (132)At 30 September 2017 12 548 131 477 1,168



Note

Ordinary shares

£m

Share premium

£m

Other reserves

£m

Retained earnings

£m

Total equity

£m

At 1 October 2015 12 541 67 242 862Profit for the year – – – 208 208Other comprehensive income/(expense): Exchange differences on translating foreign operations 15.3 – – 117 – 117Deferred tax credit on foreign currency movements 4, 15.3 – – 3 – 3Actuarial loss on post-employment benefit obligations 11, 15.4 – – – (2) (2)Deferred tax credit on actuarial loss on post-employment obligations 4. 15.4 – – – – –Total comprehensive income for the year ended 30 September 2016 – – 120 206 326Transactions with owners: Employee share option scheme: – Proceeds from shares issued – 3 – – 3– Value of employee services, net of deferred tax 15.4 – – – 9 9Purchase of treasury shares 15.4 – – – (2) (2)Dividends paid to owners of the parent 15.5 – – – (145) (145)Total transactions with owners for the year ended 30 September 2016 – 3 – (138) (135)At 30 September 2016 12 544 187 310 1,053

Consolidated statement of cash flowsFor the year ended 30 September 2017


Strategic reportG


ents

Basis of preparation and critical accounting estimates and judgements


1 Basis of preparation and critical accounting estimates and judgements Accounting policies applicable across the financial statements are shown below. Accounting policies that are specific to a component of the financial statements have been incorporated into the relevant note.

Basis of preparation The consolidated financial statements of The Sage Group plc have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”). The consolidated financial statements have been prepared under the historical cost convention, except where adopted IFRS require an alternative treatment. The principal variations from the historical cost convention relate to derivative financial instruments which are measured at fair value through profit or loss. The financial statements of the Group comprise the financial statements of the Company and entities controlled by the Company (its subsidiaries) prepared at the end of the reporting period. The accounting policies have been consistently applied across the Group. The Company controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity, which is usually from date of acquisition.

The prior year consolidated income statement, consolidated statement of cash flows and their related notes have been restated for the presentation of discontinued operations. For further information on discontinued operations see note 16. In line with the requirements of IFRS 5 ‘Non-current assets held for sale and discontinued operations’, the statement of financial position has not been restated.

New or amended accounting standards. There are no IFRS, IAS amendments or IFRIC interpretations effective for the first time this financial year that have had a material impact on the Group.

Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position, are set out in the Strategic report on pages 1 to 61.

After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future, for a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the consolidated financial statements, in accordance with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

Foreign currencies The consolidated financial statements are presented in sterling, which is the functional currency of the parent Company and the presentation currency for the consolidated financial statements.

Foreign currency transactions are recorded at the rates of exchange prevailing on the dates of the transactions. Foreign currency monetary items are translated at the rates prevailing at the end of the reporting period. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlements of monetary items and on the retranslation of monetary items are included in profit or loss for the period, except for foreign currency movements on intercompany balances where settlement is not planned or likely in the foreseeable future, in which case they are recognised in other comprehensive income. Foreign exchange movements on external borrowings which are designated as a hedge of the net investment in its related subsidiaries are recognised in the translation reserve.

The assets and liabilities of the Group’s subsidiaries outside of the UK are translated into sterling using period-end exchange rates. Income and expense items are translated at the average exchange rates for the period. Where differences arise between these rates, they are recognised in other comprehensive income and the translation reserve.

When a foreign operation is partially disposed of or sold, exchange differences that were recorded in other comprehensive income are recycled in the income statement as part of the gain or loss on sale, with the exception of exchange differences recorded in equity prior to the transition to IFRS on 1 October 2004, in accordance with IFRS 1, “First-time Adoption of International Financial Reporting Standards”.




Critical accounting estimates and judgements The preparation of financial statements requires the use of accounting estimates and assumptions by management. It also requires management to exercise its judgement in the process of applying the accounting policies. We continually evaluate our estimates, assumptions and judgements based on available information. The areas involving a higher degree of judgement or complexity are described below.

The judgements and management’s rationale in relation to these accounting estimates and judgements are assessed and where material in value or in risk, are discussed with the Audit and Risk Committee.

Revenue recognition Approximately 40% of the Company’s revenue is generated from sales to partners rather than to end users. The key judgement in accounting for the three principal ways in which our business partners are remunerated is determining whether the business partner is a customer of the Group in respect of the initial product sale. The key criteria in this determination is whether the business partner has paid for and taken on the risks and rewards of ownership of the software product from Sage. At this point the business partner is able to sell on the licence to the end user at a price of its determination and consequently bears the credit risk of the onward sale.

Where the business partner is a customer of Sage, there are two ways in which they can be remunerated. Firstly, there are discounts granted as a discount from the list price. These discounts are negotiated between the Company and the business partner prior to the sale and invoices are raised, and revenue booked is based on the discounted price. Secondly, there are further discounts given to business partners for subsequent renewals or increased sales to the end user. These discounts are recognised as a deduction from the incremental revenue earned.

Where the business partner is not a customer of Sage and their part in the sale has simply been in the form of a referral, they are remunerated in the form of a commission payment. These payments are treated as a cost within selling and administrative costs.

An additional area of judgement is the recognition and deferral of revenue on bundled products, for example the sale of a perpetual licence with an annual maintenance and support contract. When products are bundled together for the purpose of sale, the associated revenue, net of all applicable discounts, is allocated between the constituent parts of the bundle on a relative fair value basis. The Group has a systematic basis for allocating relative fair values in these situations, based upon published list prices.

Goodwill impairment There are two key judgement areas in relation to goodwill impairment.

The first is the ongoing appropriateness of the cash-generating units (“CGUs”) for the purpose of impairment testing. In the current year CGUs were assessed in the context of the Group’s evolving business model, the Sage strategy and the shift to global product development. Management continues to monitor goodwill at a country or region level and product cash flows are still predominantly generated by the existing product base within each country and region. Therefore, it was determined that the existing CGUs based on geographical area of operation remain appropriate except for the CGUs for Singapore and Malaysia. The operational management structure for these two countries has changed with effect from 1 October 2016 so that they are now managed as a single business serving a number of Asian markets. As a result, Singapore and Malaysia have been combined into a single CGU (Asia) for this year’s impairment assessment.

The other key judgement area relates to the assumptions applied in calculating the value in use of the CGUs being tested for impairment. The key assumptions applied in the calculation relate to the future performance expectations of the business – average medium-term revenue growth and long-term growth rate – as well as the discount rate to be applied in the calculation.

These key assumptions used in performing the impairment assessment are disclosed in note 6.1.

Tax provisions The Group recognises certain provisions and accruals in respect of tax which involve a degree of estimation and uncertainty where the tax treatment cannot finally be determined until a resolution has been reached by the relevant tax authority. This approach resulted in providing £25m as at 30 September 2017 (2016: £19m).

The carrying amount is sensitive to the resolution of issues which is not always within the control of the Group and it is often dependent on the efficiency of the legal processes in the relevant taxing jurisdictions in which the Group operates. Issues can take many years to resolve and assumptions on the likely outcome have therefore been made by management.

The nature of the assumptions made by management when calculating the carrying amounts relates to the estimated tax which could be payable as a result of decisions with tax authorities in respect of transactions and events whose treatment for tax purposes is uncertain. In making the estimates, management’s judgement was based on various factors, including:

– the status of recent and current tax audits and enquiries; – the results of previous claims; and – any changes to the relevant tax environments.

When making this assessment, we utilise our specialist in-house tax knowledge and experience of similar situations elsewhere to confirm these provisions. These judgements also take into consideration specialist tax advice provided by third party advisers on specific items.



1 Basis of preparation and critical accounting estimates and judgements Accounting policies applicable across the financial statements are shown below. Accounting policies that are specific to a component of the financial statements have been incorporated into the relevant note.

Basis of preparation The consolidated financial statements of The Sage Group plc have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”). The consolidated financial statements have been prepared under the historical cost convention, except where adopted IFRS require an alternative treatment. The principal variations from the historical cost convention relate to derivative financial instruments which are measured at fair value through profit or loss. The financial statements of the Group comprise the financial statements of the Company and entities controlled by the Company (its subsidiaries) prepared at the end of the reporting period. The accounting policies have been consistently applied across the Group. The Company controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity, which is usually from date of acquisition.

The prior year consolidated income statement, consolidated statement of cash flows and their related notes have been restated for the presentation of discontinued operations. For further information on discontinued operations see note 16. In line with the requirements of IFRS 5 ‘Non-current assets held for sale and discontinued operations’, the statement of financial position has not been restated.

New or amended accounting standards. There are no IFRS, IAS amendments or IFRIC interpretations effective for the first time this financial year that have had a material impact on the Group.

Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position, are set out in the Strategic report on pages 1 to 61.

After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future, for a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the consolidated financial statements, in accordance with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

Foreign currencies The consolidated financial statements are presented in sterling, which is the functional currency of the parent Company and the presentation currency for the consolidated financial statements.

Foreign currency transactions are recorded at the rates of exchange prevailing on the dates of the transactions. Foreign currency monetary items are translated at the rates prevailing at the end of the reporting period. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlements of monetary items and on the retranslation of monetary items are included in profit or loss for the period, except for foreign currency movements on intercompany balances where settlement is not planned or likely in the foreseeable future, in which case they are recognised in other comprehensive income. Foreign exchange movements on external borrowings which are designated as a hedge of the net investment in its related subsidiaries are recognised in the translation reserve.

The assets and liabilities of the Group’s subsidiaries outside of the UK are translated into sterling using period-end exchange rates. Income and expense items are translated at the average exchange rates for the period. Where differences arise between these rates, they are recognised in other comprehensive income and the translation reserve.

When a foreign operation is partially disposed of or sold, exchange differences that were recorded in other comprehensive income are recycled in the income statement as part of the gain or loss on sale, with the exception of exchange differences recorded in equity prior to the transition to IFRS on 1 October 2004, in accordance with IFRS 1, “First-time Adoption of International Financial Reporting Standards”.


Strategic reportG


ents

Basis of preparation and critical accounting estimates and judgements continued


1 Basis of preparation and critical accounting estimates and judgements continued Business combinations When the Group completes a business combination, the consideration transferred for the acquisition and the identifiable assets and liabilities acquired are recognised at their fair values. The amount by which the consideration exceeds the net assets acquired is recognised as goodwill. The application of accounting policies to business combinations involves judgement and the use of estimates. During the year, the Group made two significant business combinations in which it acquired Sage Intacct (formerly Intacct Corporation) and Sage People (formerly Fairsail Limited). The aspects of these transactions that required particular judgement were the identification of acquired intangible assets that met the criteria for recognition in both transactions. Estimates were required in the measurement of the intangible assets recognised for both acquisitions and of deferred income for Sage Intacct. The Group engaged external experts to support these assessments. Management concluded that the intangible assets acquired that qualified for recognition separately from goodwill were customer relationships, technology and, additionally for Intacct, brands. The fair values of customer relationships were determined using the excess earnings method, technology and brands using the relief from royalty method, and deferred income using a bottom-up approach. These valuation techniques require a number of key assumptions including revenue forecasts and the application of an appropriate discount rate to state future cash flows at their present value.

The total fair value of intangible assets (excluding goodwill) acquired with Intacct and Sage People was £179m. Deferred income acquired with Intacct was measured at £18m. Full analyses of the consideration transferred, assets and liabilities acquired and goodwill recognised in business combinations are set out in note 16. The note also includes an explanation of the accounting policy applied. Amounts recognised for Intacct at 30 September 2017 are provisional due to the proximity of the acquisition date to the date of approval of the Annual Report, and will be finalised during the coming year.

Future accounting standards The Directors also considered the impact on the Group of new and revised accounting standards, interpretations or amendments. The following revised and new accounting standards may have a material impact on the Group. They are currently issued but not effective for the Group for the year ended 30 September 2017:

– IFRS 9, “Financial Instruments”; – IFRS 15, “Revenue from Contracts with Customers”; and – IFRS 16, “Leases”.

IFRS 9 will be effective for the Group starting 1 October 2018 and will replace the current requirements of IAS 39 ‘Financial Instruments: Recognition and Measurement’. The main changes introduced by the new standard are new classification and measurement requirements for certain financial assets, a new expected loss model for the impairment of financial assets, revisions to the hedge accounting model and amendments to disclosures. The changes are generally to be applied retrospectively.

IFRS 15 will be effective for the Group starting 1 October 2018. The standard permits a choice of two possible transition methods for the initial application of the requirements of the new standard: (1) retrospectively to each prior reporting period presented in accordance with IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors), or (2) retrospectively with the cumulative effect of initially applying the standard recognised on the date of initial application, being 1 October 2018 for the Group (the “cumulative catch-up” approach). The Group currently has not selected the transition method for applying the new standard.

The Group is in the process of developing its future IFRS 15 revenue recognition policies and adjusting the relevant business processes to adopt these new policies. A project has been established across Sage’s main markets. This project covers the development of new revenue recognition policies as well as the identification of aspects of processes, data requirements and systems that need to be addressed in order to apply IFRS 15.




As part of this effort, several differences between current accounting policies and the future IFRS 15 based policies (as far as these have already been developed) have been identified. Based on the analyses performed so far, these differences include:

– IFRS 15 introduces a new concept of performance obligations. This will require changes to the way the transaction price is allocated to separately identifiable components of a bundle within a contract which can impact the timing of recognising revenue.

– A revised recognition pattern is expected for certain on-premise software subscription contracts, which combine the delivery of software and support service and the obligation to deliver, in the future, unspecified software upgrades. Under current policies, the Group recognises the entire price on a straight-line basis over the subscription term. In contrast, under IFRS 15, a portion of the transaction price will be recognised upon delivery of the initial software at the outset of the arrangement.

– IFRS 15 requires the establishment of standalone selling prices to be used as the basis for the apportionment of the transaction price to separate performance obligations. This is a new concept compared to current requirements and can impact timing of recognising revenue.

– The Group will have to assess whether to recognise revenue gross or net for business partner arrangements at the performance obligation level rather than at contract level.

– The Group is currently already capitalising costs to obtain a contract where revenue is recognised over time. The capitalisation amount is expected to increase under IFRS 15 due to a broader definition of what qualifies for capitalisation as costs to obtain a contract.

In addition to the effects on our consolidated income statement, the Group expects changes to the consolidated balance sheet (in particular, due to the recognition of contract assets/contract liabilities, the differentiation between contract assets and trade receivables, and an impact in retained earnings from the initial adoption of IFRS 15) and additional quantitative and qualitative disclosures in the notes to the financial statements. The quantitative impact of IFRS 15 on the Group’s FY19 financial statements cannot currently be reasonably estimated, as the following have not yet been finalised:

– Decision on a transition method; – Completion of the analysis of the volume of contracts that will be affected by the different policy changes upon adoption of IFRS 15; – Establish standalone selling prices; or – Estimation of the potential changes in business practices that may result from the adoption of the new policies.

The Group will continue to assess all the impacts that the application of IFRS 15 will have on its financial statements in the period of initial application, which will also significantly depend on its business and go-to-market strategy in the accounting year ending 30 September 2019 and beyond. The impacts, if material, will be disclosed, including statements on whether and how the Group plans to apply any of the practical expedients available in the standard.

IFRS 16 will change lease accounting mainly for lessees, and will replace the existing standard IAS 17. An asset for the right to use the leased item and a liability for future lease payments will be recognised for all leases, subject to limited exemptions for short-term leases and low-value lease assets. The costs of leases will be recognised in the income statement split between depreciation of the lease asset and a finance charge on the lease liability. This is similar to the existing accounting for finance leases, but substantively different to the existing accounting for operating leases under which no lease asset or lease liability is recognised and rentals payable are charged to the income statement on a straight-line basis. Note 3.4 details the Group’s current operating lease commitments.

The Group plans to adopt these standards in line with their effective dates. IFRSs 9 and 15 will be adopted for the financial year commencing 1 October 2018, and IFRS 16 for the financial year commencing 1 October 2019. The Group is continuing its assessment of the impact that the application of these standards will have on the Group’s financial statements, but it remains too early to determine how significant any effect on actual financial results and financial position might be.



1 Basis of preparation and critical accounting estimates and judgements continued Business combinations When the Group completes a business combination, the consideration transferred for the acquisition and the identifiable assets and liabilities acquired are recognised at their fair values. The amount by which the consideration exceeds the net assets acquired is recognised as goodwill. The application of accounting policies to business combinations involves judgement and the use of estimates. During the year, the Group made two significant business combinations in which it acquired Sage Intacct (formerly Intacct Corporation) and Sage People (formerly Fairsail Limited). The aspects of these transactions that required particular judgement were the identification of acquired intangible assets that met the criteria for recognition in both transactions. Estimates were required in the measurement of the intangible assets recognised for both acquisitions and of deferred income for Sage Intacct. The Group engaged external experts to support these assessments. Management concluded that the intangible assets acquired that qualified for recognition separately from goodwill were customer relationships, technology and, additionally for Intacct, brands. The fair values of customer relationships were determined using the excess earnings method, technology and brands using the relief from royalty method, and deferred income using a bottom-up approach. These valuation techniques require a number of key assumptions including revenue forecasts and the application of an appropriate discount rate to state future cash flows at their present value.

The total fair value of intangible assets (excluding goodwill) acquired with Intacct and Sage People was £179m. Deferred income acquired with Intacct was measured at £18m. Full analyses of the consideration transferred, assets and liabilities acquired and goodwill recognised in business combinations are set out in note 16. The note also includes an explanation of the accounting policy applied. Amounts recognised for Intacct at 30 September 2017 are provisional due to the proximity of the acquisition date to the date of approval of the Annual Report, and will be finalised during the coming year.

Future accounting standards The Directors also considered the impact on the Group of new and revised accounting standards, interpretations or amendments. The following revised and new accounting standards may have a material impact on the Group. They are currently issued but not effective for the Group for the year ended 30 September 2017:

– IFRS 9, “Financial Instruments”; – IFRS 15, “Revenue from Contracts with Customers”; and – IFRS 16, “Leases”.

IFRS 9 will be effective for the Group starting 1 October 2018 and will replace the current requirements of IAS 39 ‘Financial Instruments: Recognition and Measurement’. The main changes introduced by the new standard are new classification and measurement requirements for certain financial assets, a new expected loss model for the impairment of financial assets, revisions to the hedge accounting model and amendments to disclosures. The changes are generally to be applied retrospectively.

IFRS 15 will be effective for the Group starting 1 October 2018. The standard permits a choice of two possible transition methods for the initial application of the requirements of the new standard: (1) retrospectively to each prior reporting period presented in accordance with IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors), or (2) retrospectively with the cumulative effect of initially applying the standard recognised on the date of initial application, being 1 October 2018 for the Group (the “cumulative catch-up” approach). The Group currently has not selected the transition method for applying the new standard.

The Group is in the process of developing its future IFRS 15 revenue recognition policies and adjusting the relevant business processes to adopt these new policies. A project has been established across Sage’s main markets. This project covers the development of new revenue recognition policies as well as the identification of aspects of processes, data requirements and systems that need to be addressed in order to apply IFRS 15.


Strategic reportG


ents

Results for the year


2 Segment information

This note shows how Group revenue and Group operating profit are generated across the three reportable segments in which we operate, being Northern Europe, Central and Southern Europe and North America. The Group’s operations in Africa and the Middle East, Asia (including Australia) and Latin America do not meet the quantitative thresholds for disclosure as reportable segments under IFRS 8, and so are presented together in the analyses and described as International. This is explained further below.

For each geographical region, revenue and operating profit are compared to prior year in order to understand the movements in the year. This comparison is provided for statutory, underlying and organic revenue and operating profit.

– Statutory results reflect the Group’s results prepared in accordance with the requirements of IFRS. – “Underlying” and “underlying as reported” are non-GAAP measures. Adjustments are made to statutory results to arrive at an

underlying result which is in line with how the business is managed and measured on a day-to-day basis. Adjustments are made for items that are individually important in order to understand the financial performance. If included, these items could distort understanding of the performance for the year and the comparability between periods. Management applies judgement in determining which items should be excluded from underlying performance. See note 3.6 for details of these adjustments. In addition, the prior year underlying values are translated at current year exchange rates, so that exchange rate impacts do not distort comparisons. Prior year underlying values at prior year exchange rates are “underlying as reported”; prior year and current year values at current year exchange rates are “underlying”.

– Organic is a non-GAAP measure. The contributions of current and prior year acquisitions, disposals and assets held for sale of standalone businesses are removed so that results can be compared to the prior year on a like-for-like basis. Acquisitions and disposals which occurred close to the start of the opening comparative period where the contribution impact would be immaterial are not adjusted.

In addition, the following reconciliations are made in this note.

– Revenue per segment reconciled to the profit for the year as per the income statement. – Statutory operating profit reconciled to underlying operating profit per segment (detailing the adjustments made).




Accounting policy In accordance with IFRS 8, “Operating Segments”, information for the Group’s operating segments has been derived using the information used by the chief operating decision maker. The Group’s Executive Committee has been identified as the chief operating decision maker in accordance with their designated responsibility for the allocation of resources to operating segments and assessing their performance, through the Quarterly Business Reviews chaired by the President and Chief Financial Officer. The Executive Committee uses organic and underlying data to monitor business performance. Operating segments are reported in a manner which is consistent with the operating segments produced for internal management reporting.

With effect from 1 October 2016, the Group was organised into seven key operating segments: Northern Europe, Central Europe, Southern Europe, North America, Africa and the Middle East, Asia (including Australia) and Latin America. The structure reflected changes made to introduce a flatter, more focused structure to allow the Group to get closer to its customers. Since August 2017, the newly acquired Intacct business has been managed separately as an additional operating segment, referred to as North America Intacct. Prior to these changes, the organisation structure reflected four operating segments (Europe, North America, Brazil and Africa and Australia, Middle East and Asia) and three reportable segments. For reporting under IFRS 8 for the year ended 30 September 2017, the Group has three reportable segments. These segments and their main operating territories or businesses are as follows:

– Northern Europe (UK and Ireland) – Central and Southern Europe (Germany, Switzerland, Poland, France and Portugal) – North America (the US, Canada and North America Intacct) The remaining operating segments of Africa and the Middle East, Asia and Latin America do not meet the quantitative thresholds for presentation as separate reportable segments under IFRS 8, and so are presented together and described as International. They include the Group’s operations in South Africa, UAE, Australia, Singapore, Malaysia and Brazil.

The reportable segments reflect the aggregation of the operating segments for Central Europe and Southern Europe, and also of those for North America (excluding Intacct) and North America Intacct. In each case, the aggregated operating segments are considered to share similar economic characteristics because they have similar long-term gross margins and operate in similar markets. Central Europe and Southern Europe both operate principally within the EU and the majority of their businesses are in countries within the euro area. North America (excluding Intacct) and North America Intacct share the same North American geographical market.

Segment information for the year ended 30 September 2016 has been restated to reflect the above organisation structure and discontinued operations as detailed in note 16.3. The UK is the home country of the parent.

Segment reporting The tables overleaf show a segmental analysis of the results for continuing operations.

The revenue analysis in the table overleaf is based on the location of the customer which is not materially different from the location where the order is received and where the assets are located.

Revenue categories are defined in note 3.1.



2 Segment information

This note shows how Group revenue and Group operating profit are generated across the three reportable segments in which we operate, being Northern Europe, Central and Southern Europe and North America. The Group’s operations in Africa and the Middle East, Asia (including Australia) and Latin America do not meet the quantitative thresholds for disclosure as reportable segments under IFRS 8, and so are presented together in the analyses and described as International. This is explained further below.

For each geographical region, revenue and operating profit are compared to prior year in order to understand the movements in the year. This comparison is provided for statutory, underlying and organic revenue and operating profit.

– Statutory results reflect the Group’s results prepared in accordance with the requirements of IFRS. – “Underlying” and “underlying as reported” are non-GAAP measures. Adjustments are made to statutory results to arrive at an

underlying result which is in line with how the business is managed and measured on a day-to-day basis. Adjustments are made for items that are individually important in order to understand the financial performance. If included, these items could distort understanding of the performance for the year and the comparability between periods. Management applies judgement in determining which items should be excluded from underlying performance. See note 3.6 for details of these adjustments. In addition, the prior year underlying values are translated at current year exchange rates, so that exchange rate impacts do not distort comparisons. Prior year underlying values at prior year exchange rates are “underlying as reported”; prior year and current year values at current year exchange rates are “underlying”.

– Organic is a non-GAAP measure. The contributions of current and prior year acquisitions, disposals and assets held for sale of standalone businesses are removed so that results can be compared to the prior year on a like-for-like basis. Acquisitions and disposals which occurred close to the start of the opening comparative period where the contribution impact would be immaterial are not adjusted.

In addition, the following reconciliations are made in this note.

– Revenue per segment reconciled to the profit for the year as per the income statement. – Statutory operating profit reconciled to underlying operating profit per segment (detailing the adjustments made).


Strategic reportG


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Results for the year continued


2 Segment information continued 2.1 Revenue by segment

Year ended 30 September 2017 Change

Statutory £m

Underlyingadjustments

£mUnderlying

£m

Organicadjustments

£mOrganic

£m Statutory Underlying Organic

Recurring revenue by segment Northern Europe 292 – 292 (5) 287 12.1% 11.5% 9.4%Central and Southern Europe 450 – 450 (1) 449 18.2% 5.8% 6.0%North America 388 5 393 (15) 378 25.9% 13.3% 9.2%International 201 – 201 (1) 200 40.2% 14.8% 15.1%Recurring revenue 1,331 5 1,336 (22) 1,314 21.8% 10.5% 9.0%Software and software related services (“SSRS”) revenue by segment Northern Europe 39 – 39 – 39 (2.7%) (4.0%) (4.0%)Central and Southern Europe 130 – 130 – 130 19.6% 7.0% 7.2%North America 72 – 72 (1) 71 1.7% (9.6%) (10.6%)International 60 – 60 (1) 59 15.2% (4.1%) (4.6%)SSRS revenue 301 – 301 (2) 299 10.8% (1.1%) (1.4%)Processing revenue by segment Northern Europe 37 – 37 – 37 5.5% 4.2% 4.2%Central and Southern Europe – – – – – (100.0%) (100.0%) (100.0%)North America 32 – 32 – 32 15.0% 2.3% 2.3%International 14 – 14 – 14 31.3% 6.8% 6.8%Processing revenue 83 – 83 – 83 10.7% 1.9% 1.9%Total revenue by segment Northern Europe 368 – 368 (5) 363 9.6% 8.9% 7.3%Central and Southern Europe 580 – 580 (1) 579 18.2% 5.8% 6.0%North America 492 5 497 (16) 481 21.0% 8.6% 5.3%International 275 – 275 (2) 273 33.4% 9.7% 9.7%Total revenue 1,715 5 1,720 (24) 1,696 19.2% 7.8% 6.6% Year ended 30 September 2016

Statutory and underlying as reported

£m

Impact of foreign exchange

£m Underlying

£m

Organicadjustments

£mOrganic

£m

Recurring revenue by segment Northern Europe 261 1 262 – 262Central and Southern Europe 381 45 426 (2) 424North America 308 39 347 – 347International 143 32 175 (1) 174Recurring revenue 1,093 117 1,210 (3) 1,207Software and software related services (“SSRS”) revenue by segment Northern Europe 40 1 41 – 41Central and Southern Europe 109 13 122 (1) 121North America 70 9 79 – 79International 53 10 63 (1) 62SSRS revenue 272 33 305 (2) 303Processing revenue by segment Northern Europe 35 – 35 – 35Central and Southern Europe 1 1 2 – 2North America 27 4 31 – 31International 11 2 13 – 13Processing revenue 74 7 81 – 81Total revenue by segment Northern Europe 336 2 338 – 338Central and Southern Europe 491 59 550 (3) 547North America 405 52 457 – 457International 207 44 251 (2) 249Total revenue 1,439 157 1,596 (5) 1,591




2.2 Operating profit by segment Year ended 30 September 2017 Change

Statutory

£m

Underlying adjustments

£mUnderlying

£m

Organic adjustments

£mOrganic


Operating profit by segment Northern Europe 135 25 160 5 165 26.2% 22.6% 25.8%Central and Southern Europe 129 33 162 (1) 161 121.4% 14.8% 15.2%North America 65 44 109 4 113 (14.2%) (5.6%) (2.1%)International 19 17 36 – 36 (27.6%) (19.4%) (18.7%)Total operating profit 348 119 467 8 475 30.3% 8.2% 10.3%

Year ended 30 September 2016

Statutory

£m

Underlying adjustments

£m

Underlyingas

reported £m

Impact of foreign

exchange £m

Underlying £m

Organicadjustments

£m Organic

£m

Operating profit by segment Northern Europe 107 22 129 2 131 – 131Central and Southern Europe 59 66 125 16 141 (1) 140North America 75 27 102 14 116 – 116International 26 11 37 7 44 – 44Total operating profit 267 126 393 39 432 (1) 431

The results by segment from continuing operations were as follows:

Year ended 30 September 2017 Note

NorthernEurope

£m

Central andSouthern

Europe £m

North America

£m

Total reportable segments

£mInternational

£mGroup

£m

Revenue 368 580 492 1,440 275 1,715Segment statutory operating profit 135 129 65 329 19 348Share of loss of an associate (1)Gain on remeasurement of existing investment in an associate 3.6 13Finance income 3.5 10Finance costs 3.5 (28)Profit before income tax 342Income tax expense 4 (85)Profit for the year – continuing operations 257

Reconciliation of underlying operating profit to statutory operating profit

NorthernEurope

£m

Central andSouthern

Europe £m

North America

£m


£mInternational

£mGroup

£m

Underlying operating profit 160 162 109 431 36 467Amortisation of acquired intangible assets (note 3.6) (4) (5) (9) (18) (4) (22)Other acquisition-related items (note 3.6) (6) – (21) (27) – (27)Non-recurring items (note 3.6) (15) (28) (14) (57) (13) (70)Statutory operating profit 135 129 65 329 19 348



2 Segment information continued 2.1 Revenue by segment

Year ended 30 September 2017 Change

Statutory £m

Underlyingadjustments

£mUnderlying

£m

Organicadjustments

£mOrganic


Recurring revenue by segment Northern Europe 292 – 292 (5) 287 12.1% 11.5% 9.4%Central and Southern Europe 450 – 450 (1) 449 18.2% 5.8% 6.0%North America 388 5 393 (15) 378 25.9% 13.3% 9.2%International 201 – 201 (1) 200 40.2% 14.8% 15.1%Recurring revenue 1,331 5 1,336 (22) 1,314 21.8% 10.5% 9.0%Software and software related services (“SSRS”) revenue by segment Northern Europe 39 – 39 – 39 (2.7%) (4.0%) (4.0%)Central and Southern Europe 130 – 130 – 130 19.6% 7.0% 7.2%North America 72 – 72 (1) 71 1.7% (9.6%) (10.6%)International 60 – 60 (1) 59 15.2% (4.1%) (4.6%)SSRS revenue 301 – 301 (2) 299 10.8% (1.1%) (1.4%)Processing revenue by segment Northern Europe 37 – 37 – 37 5.5% 4.2% 4.2%Central and Southern Europe – – – – – (100.0%) (100.0%) (100.0%)North America 32 – 32 – 32 15.0% 2.3% 2.3%International 14 – 14 – 14 31.3% 6.8% 6.8%Processing revenue 83 – 83 – 83 10.7% 1.9% 1.9%Total revenue by segment Northern Europe 368 – 368 (5) 363 9.6% 8.9% 7.3%Central and Southern Europe 580 – 580 (1) 579 18.2% 5.8% 6.0%North America 492 5 497 (16) 481 21.0% 8.6% 5.3%International 275 – 275 (2) 273 33.4% 9.7% 9.7%Total revenue 1,715 5 1,720 (24) 1,696 19.2% 7.8% 6.6% Year ended 30 September 2016

Statutory and underlying as reported

£m

Impact of foreign exchange

£m Underlying

£m

Organicadjustments

£mOrganic

£m

Recurring revenue by segment Northern Europe 261 1 262 – 262Central and Southern Europe 381 45 426 (2) 424North America 308 39 347 – 347International 143 32 175 (1) 174Recurring revenue 1,093 117 1,210 (3) 1,207Software and software related services (“SSRS”) revenue by segment Northern Europe 40 1 41 – 41Central and Southern Europe 109 13 122 (1) 121North America 70 9 79 – 79International 53 10 63 (1) 62SSRS revenue 272 33 305 (2) 303Processing revenue by segment Northern Europe 35 – 35 – 35Central and Southern Europe 1 1 2 – 2North America 27 4 31 – 31International 11 2 13 – 13Processing revenue 74 7 81 – 81Total revenue by segment Northern Europe 336 2 338 – 338Central and Southern Europe 491 59 550 (3) 547North America 405 52 457 – 457International 207 44 251 (2) 249Total revenue 1,439 157 1,596 (5) 1,591


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2 Segment information continued 2.2 Operating profit by segment continued



NorthernEurope

£m

Central andSouthern

Europe £m

North America

£m

Total Reportable segments

£m International

£mGroup

£m

Revenue 336 491 405 1,232 207 1,439Segment statutory operating profit 107 59 75 241 26 267Share of loss of an associate (1)Finance income 3.5 5Finance costs 3.5 (29)Profit before income tax 242Income tax expense 4 (54)Profit for the year – continuing operations 188


NorthernEurope

£m

Central andSouthern

Europe £m

North America

£m


£m International

£mGroup

£m

Underlying operating profit 129 125 102 356 37 393Amortisation of acquired intangible assets (note 3.6) (1) (5) (6) (12) (5) (17)Other acquisition-related items (note 3.6) – – (1) (1) – (1)Non-recurring items (note 3.6) (21) (61) (20) (102) (6) (108)Statutory operating profit 107 59 75 241 26 267

2.3 Analysis by geographic location

Management deems countries which generate more than 10% of total Group revenue to be material. Additional disclosures have been provided below to show the proportion of revenue from these countries.

Revenue by individually significant countries 2017

£m2016 £m

UK 343 320France 278 247USA 414 344Other individually immaterial countries 680 528 1,715 1,439

Management deems countries which contribute more than 10% to total Group non-current assets to be material. Additional disclosures have been provided below to show the proportion of non-current assets from these countries.

Non-current assets presented below excludes deferred tax assets, post-employment benefit assets and financial instruments.

Non-current assets by geographical location 2017

£m2016 £m

UK 387 272France 244 239USA 1,455 1,011Other individually immaterial countries 359 378 2,445 1,900




3 Profit before income tax

This note sets out the Group’s profit before tax, by looking in more detail at the key operating costs, including a breakdown of the costsincurred as an employer, research and development costs, the cost of the external audit of the Group’s financial statements and finance costs. This note also sets out the Group’s revenue recognition policy.

In addition, this note analyses the future amounts payable under operating lease agreements, which the Group has entered into as at the year end. These commitments are not included as liabilities in the consolidated balance sheet.

This note also provides a breakdown of any material recurring and non-recurring costs that have been reported separately on the face of the income statement.

3.1 Revenue

Accounting policy Revenue is measured at the fair value of the consideration received or receivable and represents amounts received or receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales-related taxes.

The Group reports revenue under three revenue categories and the basis of recognition for each category is described below: Category and Examples Accounting Treatment

Recurring revenue Subscription contracts Maintenance and support contracts

Recurring revenue is revenue earned from customers for the provision of a good or service, where risks and rewards are transferred to the customer over the term of a contract, with the customer being unable to continue to benefit from the full functionality of the good or service without ongoing payments. Subscription revenue is revenue earned from customers for the provision of a good or service, where the risk and rewards are transferred to the customer over the term of a contract. In the event that the customer stops paying, they lose the legal right to use the software and the Company has the ability to restrict the use of the product or service. (Also known as ‘Pay to play’). Subscription revenue and maintenance and support revenue are recognised on a straight-line basis over the term of the contract (including non-specified upgrades, when included). Revenue relating to future periods is classified as deferred income on the balance sheet to reflect the transfer of risk and reward.

Software and software-related services Perpetual software licences Upgrades to perpetual licences Professional services Training Hardware and stationery

Perpetual software licences and specified upgrades revenue are recognised when the significant risks and rewards of ownership relating to the licence have been transferred and it is probable that the economic benefits associated with the transaction will flow to the Group. This is when the goods have left the warehouse to be shipped to the customer or when electronic delivery has taken place. Other product revenue (which includes hardware and stationery) is recognised as the products are shipped to the customer. Other services revenue (which includes the sale of professional services and training) is recognised when delivered, or by reference to the stage of completion of the transaction at the end of the reporting period. This assessment is made by comparing the proportion of contract costs incurred to date to the total expected costs to completion.

Processing revenue Payment processing services Payroll processing services

Processing revenue is revenue earned from customers for the processing of payments or where Sage colleagues process our customers’ payroll. Processing revenue is recognised at the point that the service is rendered on a per transaction basis.

When products are bundled together before being sold to the customer, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction. The associated revenue is allocated between the constituent parts of the bundle on a relative fair value basis. When customers are offered discounts on bundled products and/or services, the combined discount is allocated to the constituent elements of the bundle, based upon publically available list prices.



2 Segment information continued 2.2 Operating profit by segment continued



NorthernEurope

£m

Central andSouthern

Europe £m

North America

£m

Total Reportable segments

£m International

£mGroup

£m

Revenue 336 491 405 1,232 207 1,439Segment statutory operating profit 107 59 75 241 26 267Share of loss of an associate (1)Finance income 3.5 5Finance costs 3.5 (29)Profit before income tax 242Income tax expense 4 (54)Profit for the year – continuing operations 188


NorthernEurope

£m

Central andSouthern

Europe £m

North America

£m


£m International

£mGroup

£m

Underlying operating profit 129 125 102 356 37 393Amortisation of acquired intangible assets (note 3.6) (1) (5) (6) (12) (5) (17)Other acquisition-related items (note 3.6) – – (1) (1) – (1)Non-recurring items (note 3.6) (21) (61) (20) (102) (6) (108)Statutory operating profit 107 59 75 241 26 267

2.3 Analysis by geographic location

Management deems countries which generate more than 10% of total Group revenue to be material. Additional disclosures have been provided below to show the proportion of revenue from these countries.

Revenue by individually significant countries 2017

£m2016 £m

UK 343 320France 278 247USA 414 344Other individually immaterial countries 680 528 1,715 1,439

Management deems countries which contribute more than 10% to total Group non-current assets to be material. Additional disclosures have been provided below to show the proportion of non-current assets from these countries.

Non-current assets presented below excludes deferred tax assets, post-employment benefit assets and financial instruments.

Non-current assets by geographical location 2017

£m2016 £m

UK 387 272France 244 239USA 1,455 1,011Other individually immaterial countries 359 378 2,445 1,900


Strategic reportG


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3 Profit before income tax continued 3.2 Operating profit

Accounting policy Cost of sales includes items such as third party royalties, transaction and credit card fees related to the provision of payment processing services and the cost of hardware and inventories. These also include the third party costs of providing training and professional services to customers. All other operating expenses incurred in the ordinary course of business are recorded in selling and administrative expenses.

The following items have been included in arriving at operating profit from continuing operations Note 2017

£m2016 £m

Staff costs 768 651Cost of inventories recognised as an expense (included in cost of sales) 9.1 7 9Depreciation of property, plant and equipment 7 22 22Amortisation of intangible assets 6.2 36 28Impairment of property, plant and equipment 7 – 6Gain on disposal of subsidiary 3.6 (3) –Other operating lease rentals payable 24 28M&A activity-related items 3.6 22 1

The Group within both continuing and discontinued operations incurred £179m (2016: £144m) of research and development expenditure in the year, of which £154m (2016: £129m) relates to total Group staff costs included above. See note 6.2 for the research and development accounting policy. The Group also incurred £73m (2016: £110m) of transformation costs. See note 3.6 for a detailed explanation of these costs.

Services provided by the Group’s auditor and network firms

During the year, the Group (including its overseas subsidiaries) obtained the following services from the Group’s auditor at costs as detailed below:

2017

£m2016 £m

Fees payable to the Group’s auditor for the audit of the Plc’s companies and the consolidated accounts 2 1Fees payable to the Group’s auditor for the audit of the Company’s subsidiaries 2 2Fees payable to the Group’s auditor for audit-related assurance services – –Total audit and audit related services 4 3Tax compliance services – –Tax advisory services – –Other non-audit services – –Total fees 4 3

A summary of the Board’s policy in respect of the procurement of non-audit services for the Group’s auditor is set out on page 81.




3.3 Employees and Directors

Average monthly number of people employed (including Directors) 2017

number2016

number

By segment: Northern Europe 2,934 2,766Central and Southern Europe 4,429 4,595North America 2,627 2,569International 3,805 3,811 13,795 13,741

Staff costs (including Directors on service contracts) Note2017

£m2016 £m

Wages and salaries 674 572Social security costs 93 80Post-employment benefits 11 12 12Share-based payments 15.2 10 8 789 672

Average monthly number of people employed and staff costs are for the whole Group and therefore include both continuing and discontinued operations.

Key management compensation 2017

£m2016 £m

Salaries and short-term employee benefits 5 7Post-employment benefits – 1Share-based payments 3 3 8 11

Key management personnel are deemed to be members of the Executive Committee as shown on page 66. The key management figures given above include the Executive Directors of the Group.

3.4 Operating lease commitments

Accounting policy Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term.

2017 2016

Total future minimum lease payments under non-cancellable operating leases falling due for payment as follows:

Property, vehicles, plant

and equipment £m


and equipment £m

Within one year 28 34Later than one year and less than five years 93 94After five years 37 37 158 165

The Group leases various offices and warehouses under non-cancellable operating lease agreements. These leases have various terms, escalation clauses and renewal rights. The Group also leases vehicles, plant and equipment under non-cancellable operating lease agreements.



3 Profit before income tax continued 3.2 Operating profit

Accounting policy Cost of sales includes items such as third party royalties, transaction and credit card fees related to the provision of payment processing services and the cost of hardware and inventories. These also include the third party costs of providing training and professional services to customers. All other operating expenses incurred in the ordinary course of business are recorded in selling and administrative expenses.

The following items have been included in arriving at operating profit from continuing operations Note 2017

£m2016 £m

Staff costs 768 651Cost of inventories recognised as an expense (included in cost of sales) 9.1 7 9Depreciation of property, plant and equipment 7 22 22Amortisation of intangible assets 6.2 36 28Impairment of property, plant and equipment 7 – 6Gain on disposal of subsidiary 3.6 (3) –Other operating lease rentals payable 24 28M&A activity-related items 3.6 22 1

The Group within both continuing and discontinued operations incurred £179m (2016: £144m) of research and development expenditure in the year, of which £154m (2016: £129m) relates to total Group staff costs included above. See note 6.2 for the research and development accounting policy. The Group also incurred £73m (2016: £110m) of transformation costs. See note 3.6 for a detailed explanation of these costs.

Services provided by the Group’s auditor and network firms

During the year, the Group (including its overseas subsidiaries) obtained the following services from the Group’s auditor at costs as detailed below:

2017

£m2016 £m

Fees payable to the Group’s auditor for the audit of the Plc’s companies and the consolidated accounts 2 1Fees payable to the Group’s auditor for the audit of the Company’s subsidiaries 2 2Fees payable to the Group’s auditor for audit-related assurance services – –Total audit and audit related services 4 3Tax compliance services – –Tax advisory services – –Other non-audit services – –Total fees 4 3

A summary of the Board’s policy in respect of the procurement of non-audit services for the Group’s auditor is set out on page 81.


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3 Profit before income tax continued 3.5 Finance income and costs

Accounting policy Finance income and costs are recognised using the effective interest method. Finance costs are recognised in the income statement simultaneously with the recognition of an increase in a liability or the reduction in an asset. Derivative financial instruments are measured at fair value through profit or loss. Foreign currency movements on intercompany balances are recognised in the profit and loss account unless settlement is not planned or likely in the foreseeable future, in which case they are recognised in other comprehensive income.

2017

£m2016 £m

Finance income: Interest income on short-term deposits 2 2Foreign currency movements on intercompany balances 1 –Fair value adjustments to debt-related financial instruments 7 3Finance income 10 5 Finance costs: Finance costs on bank borrowings (7) (3)Finance costs on US senior loan notes (19) (19)Fair value adjustments to debt-related financial instruments (1) –Amortisation of issue costs (1) (1)Foreign currency movements on intercompany balances – (6)Finance costs (28) (29) Finance costs – net (18) (24)

3.6 Adjustments between underlying and statutory results

Accounting policy The business is managed and measured on a day-to-day basis using underlying results. To arrive at underlying results, certain adjustments are made for items that are individually important and which could, if included, distort the understanding of the performance for the year and the comparability between periods.

Management applies judgement in determining which items should be excluded from underlying performance.

Recurring items These are items which occur regularly but which management judge to have a distorting effect on the underlying results of the Group. These items relate mainly to fair value adjustments on financial instruments and merger and acquisition (“M&A”) related activity, although other types of recurring items may arise. M&A activity by its nature is irregular in its impact and includes amortisation, adjustments to acquired deferred income and acquisition and disposal-related costs, including integration costs relating to an acquired business and acquisition-related remuneration. Foreign currency movements on intercompany balances that are charged through the income statement are excluded from underlying so that exchange rate impacts do not distort comparisons. Recurring items are adjusted each year irrespective of materiality to ensure consistent treatment.

Non-recurring items These are items which are non-recurring and are adjusted on the basis of either their size or their nature. These items can include, but are not restricted to, gains and losses on the disposal of assets, impairment charges and reversals, and restructuring-related costs. As these items are one-off or non-operational in nature, management considers that they would distort the Group’s underlying business performance.




Recurring2017

£m

Non-recurring2017

£m

Total 2017

£m

Recurring2016

£m

Non-recurring2016

£m

Total2016

£m

M&A activity-related items Amortisation of acquired intangibles 22 – 22 17 – 17Gain on disposal of subsidiary – (3) (3) – – – Adjustment to acquired deferred income 5 – 5 – – –Other M&A activity-related items 22 – 22 1 – 1Other items Litigation-related items – – – – (2) (2)Business transformation costs – 73 73 – 110 110Total adjustments made to operating profit 49 70 119 18 108 126Fair value adjustments (6) – (6) (3) – (3)Gain on remeasurement of existing investment in an associate – (13) (13) – – –Amortisation of acquired intangibles 1 – 1 1 – 1Foreign currency movements on intercompany balances (1) – (1) 6 – 6Total adjustments made to profit before income tax 43 57 100 22 108 130

Recurring items Acquired intangibles are assets which have previously been recognised as part of business combinations. These assets are predominantly brands, customer relationships and technology rights. Further details including specific accounting policies in relation to these assets can be found in note 6.2.

The adjustment to acquired deferred income represents the additional revenue that would have been recorded in the year had deferred income not been reduced as part of the purchase price allocation adjustment made for business combinations. A further £12m will arise in FY18.

Other M&A activity-related items relate to completed transaction costs and include advisory, legal, accounting, valuation and other professional or consulting services as well as acquisition-related remuneration and directly attributable integration costs. The main costs relate to the acquisitions in the year, see note 16.

The fair value adjustments comprises a £7m credit (2016: £nil) relating to a fair value adjustment of financial assets offset by a charge of £1m (2016: gain of £3m) in relation to an embedded derivative asset which relates to contractual terms agreed as part of the US private placement debt.

Amortisation of acquired intangibles below operating profit relates to the Group’s share of the amortisation of intangible assets arising on the acquisition of an investment in an associate accounted for under the equity method.

Foreign currency movements on intercompany balances of £1m (2016: charge of £6m) occurs due to retranslation of intercompany balances other than those where settlement is not planned or likely in the foreseeable future. The balance arises in the current year due to fluctuation in exchange rates, predominately the movement in Euro and US Dollar compared to sterling.

Non-recurring items Net charges in respect of non-recurring items amounted to £57m (2016: £108m).

Charges of £73m have been incurred in the current year as a result of the implementation of the business transformation. This is comprised of people-related reorganisation charges of £32m (2016: £51m), net property exit costs of £14m (2016: £40m) and other directly attributable costs, mainly relating to consultancy, contractor and asset write downs, of £27m (2016: £19m).

The people-related reorganisation charges comprise severance costs of £29m (2016: £44m) with the remaining cost largely arising from retention payments, transition and overlap costs whilst implementing the Group’s new operating model. The property exit costs consist of net lease exit costs following consolidation of office space used and impairment and accelerated depreciation of leasehold improvement assets and other related assets that are no longer in use due to the property exits. The other costs include expenditure that is directly attributable to the business transformation, including advisory, legal, accounting, valuation and other professional or consulting services.

These charges are one-off in nature and directly linked to the business transformation undertaken in the current and prior year. No further related non-recurring costs are expected to arise in FY18 and subsequent financial years in relation to the business transformation.

Total cash paid in relation to the business transformation strategy totalled £72m (2016: £58m) in the year.

The gain on disposal of subsidiary relates to the sale of Syska, see note 16.

The gain on remeasurement of existing investment in an associate relates to the acquisition of Fairsail, see note 16.

See note 4 for the tax impact of these adjustments.



3 Profit before income tax continued 3.5 Finance income and costs

Accounting policy Finance income and costs are recognised using the effective interest method. Finance costs are recognised in the income statement simultaneously with the recognition of an increase in a liability or the reduction in an asset. Derivative financial instruments are measured at fair value through profit or loss. Foreign currency movements on intercompany balances are recognised in the profit and loss account unless settlement is not planned or likely in the foreseeable future, in which case they are recognised in other comprehensive income.

2017

£m2016 £m

Finance income: Interest income on short-term deposits 2 2Foreign currency movements on intercompany balances 1 –Fair value adjustments to debt-related financial instruments 7 3Finance income 10 5 Finance costs: Finance costs on bank borrowings (7) (3)Finance costs on US senior loan notes (19) (19)Fair value adjustments to debt-related financial instruments (1) –Amortisation of issue costs (1) (1)Foreign currency movements on intercompany balances – (6)Finance costs (28) (29) Finance costs – net (18) (24)

3.6 Adjustments between underlying and statutory results

Accounting policy The business is managed and measured on a day-to-day basis using underlying results. To arrive at underlying results, certain adjustments are made for items that are individually important and which could, if included, distort the understanding of the performance for the year and the comparability between periods.

Management applies judgement in determining which items should be excluded from underlying performance.

Recurring items These are items which occur regularly but which management judge to have a distorting effect on the underlying results of the Group. These items relate mainly to fair value adjustments on financial instruments and merger and acquisition (“M&A”) related activity, although other types of recurring items may arise. M&A activity by its nature is irregular in its impact and includes amortisation, adjustments to acquired deferred income and acquisition and disposal-related costs, including integration costs relating to an acquired business and acquisition-related remuneration. Foreign currency movements on intercompany balances that are charged through the income statement are excluded from underlying so that exchange rate impacts do not distort comparisons. Recurring items are adjusted each year irrespective of materiality to ensure consistent treatment.

Non-recurring items These are items which are non-recurring and are adjusted on the basis of either their size or their nature. These items can include, but are not restricted to, gains and losses on the disposal of assets, impairment charges and reversals, and restructuring-related costs. As these items are one-off or non-operational in nature, management considers that they would distort the Group’s underlying business performance.


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4 Income tax expense

This note analyses the tax expense for this financial year which includes both current and deferred tax. Current tax expense represents the amount payable on this year’s taxable profits and any adjustments relating to prior years. Deferred tax is an accounting adjustment to provide for tax that is expected to arise in the future due to differences between the carrying values of assets and liabilities and their respective tax bases.

This note outlines the tax accounting policies, analyses the current and deferred tax expenses in the year and presents a reconciliation between profit before tax in the income statement multiplied by the UK rate of corporation tax and the tax expense for the year.

Accounting policy The taxation expense for the year represents the sum of current tax payable and deferred tax. The expense is recognised in the income statement and statement of comprehensive income according to the accounting treatment of the related transaction.

Current tax payable or receivable is based on the taxable income for the period and any adjustment in respect of prior periods. Current tax is calculated using tax rates that have been enacted or substantively enacted at the end of the reporting period.

Deferred tax arises due to certain temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases (note 12).

Analysis of expense in the year Note 2017

£m2016 £m

Current income tax – Current tax on profit for the year 98 77– Adjustment in respect of prior years (8) (16)Current income tax on continuing operations 90 61Current income tax on discontinued operations 13 13 103 74 Deferred tax – Origination and reversal of temporary differences (7) (12)– Adjustment in respect of prior years 2 5Deferred tax 12 (5) (7) The current year tax expense is split into the following: Underlying tax expense 115 92Tax credit on adjustments between the underlying and statutory operating profit (30) (38)Income tax expense on continuing operations 85 54Income tax expense on discontinued operations 13 13Income tax expense reported in income statement 98 67

The majority of the current tax adjustment in respect of prior years of £8m (2016: £16m) reflects the resolution of a number of historical tax matters, including settlements with a number of tax authorities and true-ups to prior year estimates.

2017

£m2016 £m

Tax on items credited to other comprehensive income Deferred tax charge on actuarial loss on post-employment benefit obligations 1 –Deferred tax credit on foreign exchange movements (2) (3)Total tax on items credited to other comprehensive income (1) (3)

Deferred tax charge relating to share options of £1m (2016: credit of £1m) has been recognised directly in equity.




The tax for the year is higher (2016: higher) than the rate of UK corporation tax applicable to the Group of 19.5% (2016: 20%). The differences are explained below:

2017

£m2016 £m

Profit before income tax from continuing operations 342 242Profit before income tax from discontinued operations 56 33Total profit before income tax 398 275Statutory profit before income tax multiplied by the rate of UK corporation tax of 19.5% (2016: 20%) 78 55Tax effects of: Adjustments in respect of prior years (6) (11)Adjustments in respect of foreign tax rates 38 23Non-taxable US accounting gain on disposal (11) –US tax gain on disposal 2 –Non-deductible expenses and permanent items 3 (1) Non-taxable gain on re-measurement of existing investments in an associate (2) –Withholding tax 4 1Foreign tax credit (6) (3)Local business tax 3 3Innovation tax credit (2) (1)Recognition of tax losses (3) –Recognition of amortisation claims – 1At the effective income tax rate of 25% (2016: 24%) 98 67Income tax expense reported in the income statement 85 54Income tax attributable to discontinued operations 13 13 98 67

The effective tax rate on statutory profit before tax was 25% (2016: 24%), whilst the effective tax rate on underlying profit before tax on continuing operations was 26% (2016: 25%). The difference between the statutory effective tax rate and the underlying tax rate relates to non-recurring items which are deductible in countries with a tax rate higher than the UK.

The effective tax rate is higher than the UK corporation tax rate applicable to the Group due to the geographic profile of the Group. In addition, there is an obligation to account for local business taxes in the corporate tax expense. These additional tax expenses are offset by innovation tax credits for registered patents and research and development activities which are a government incentive in a number of operating territories.

The European Commission has announced that an investigation will be opened in to the UK’s controlled foreign company (“CFC”) rules. The CFC rules levy a charge on foreign entities controlled by the UK that are subject to a lower rate of tax, however there is currently an exemption available for 75% of this charge if the activities being undertaken by the CFC relate to financing. The EC are investigating whether this exemption is in breach of EU State Aid rules. The detailed arguments of the EC are not yet available and it is unlikely that a final decision on this matter will be available within the next year. No provision for this potential liability has been provided in these financial statements as it is not clear what, if any, the ultimate financial result will be.

5 Earnings per share

This note shows how earnings per share (“EPS”) is calculated. EPS is the amount of post-tax profit attributable to each ordinary share. Diluted EPS shows what the impact would be if all potentially dilutive ordinary shares in respect of exercisable share options were exercised and treated as ordinary shares at the year end.

This note also provides a reconciliation between the statutory profit figure, which ties to the consolidated income statement on page 119, and the Group’s internal measure of performance, underlying profit. See note 3.6 for details of the adjustments made between statutory and underlying profit, and note 4 for the tax impact on these adjustments.



4 Income tax expense

This note analyses the tax expense for this financial year which includes both current and deferred tax. Current tax expense represents the amount payable on this year’s taxable profits and any adjustments relating to prior years. Deferred tax is an accounting adjustment to provide for tax that is expected to arise in the future due to differences between the carrying values of assets and liabilities and their respective tax bases.

This note outlines the tax accounting policies, analyses the current and deferred tax expenses in the year and presents a reconciliation between profit before tax in the income statement multiplied by the UK rate of corporation tax and the tax expense for the year.

Accounting policy The taxation expense for the year represents the sum of current tax payable and deferred tax. The expense is recognised in the income statement and statement of comprehensive income according to the accounting treatment of the related transaction.

Current tax payable or receivable is based on the taxable income for the period and any adjustment in respect of prior periods. Current tax is calculated using tax rates that have been enacted or substantively enacted at the end of the reporting period.

Deferred tax arises due to certain temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases (note 12).

Analysis of expense in the year Note 2017

£m2016 £m

Current income tax – Current tax on profit for the year 98 77– Adjustment in respect of prior years (8) (16)Current income tax on continuing operations 90 61Current income tax on discontinued operations 13 13 103 74 Deferred tax – Origination and reversal of temporary differences (7) (12)– Adjustment in respect of prior years 2 5Deferred tax 12 (5) (7) The current year tax expense is split into the following: Underlying tax expense 115 92Tax credit on adjustments between the underlying and statutory operating profit (30) (38)Income tax expense on continuing operations 85 54Income tax expense on discontinued operations 13 13Income tax expense reported in income statement 98 67

The majority of the current tax adjustment in respect of prior years of £8m (2016: £16m) reflects the resolution of a number of historical tax matters, including settlements with a number of tax authorities and true-ups to prior year estimates.

2017

£m2016 £m

Tax on items credited to other comprehensive income Deferred tax charge on actuarial loss on post-employment benefit obligations 1 –Deferred tax credit on foreign exchange movements (2) (3)Total tax on items credited to other comprehensive income (1) (3)

Deferred tax charge relating to share options of £1m (2016: credit of £1m) has been recognised directly in equity.


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5 Earnings per share continued

Accounting policy Basic earnings per share is calculated by dividing the profit for the year attributable to owners of the parent by the weighted average number of ordinary shares in issue during the year, excluding those held as treasury shares, which are treated as cancelled.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares, exercisable at the end of the year. The Group has one class of dilutive potential ordinary shares. They are share options granted to employees where the exercise price is less than the average market price of the Company’s ordinary shares during the year.

Reconciliations of the earnings and weighted average number of shares Underlying

2017

Underlying as reported

2016 Underlying

2016 Statutory

2017Statutory

2016

Earnings attributable to owners of the parent – Continuing operations (£m) Profit for the year 327 280 308 257 188 Number of shares (millions) Weighted average number of shares 1,080 1,077 1,077 1,080 1,077Dilutive effects of shares 4 6 6 4 6 1,084 1,083 1,083 1,084 1,083Earnings per share attributable to owners of the parent – Continuing operations Basic earnings per share (pence) 30.28 25.90 28.59 23.86 17.43

Diluted earnings per share (pence) 30.18 25.75 28.42 23.78 17.33


2017


2016 Underlying

2016 Statutory

2017Statutory

2016

Earnings attributable to owners of the parent – Continuing and discontinued operations (£m)

Profit for the year 345 300 332 300 208 Number of shares (millions) Weighted average number of shares 1,080 1,077 1,077 1,080 1,077Dilutive effects of shares 4 6 6 4 6 1,084 1,083 1,083 1,084 1,083Earnings per share attributable to owners of the parent – Continuing and discontinued operations Basic earnings per share (pence) 31.90 27.84 30.82 27.80 19.28


Reconciliations of the earnings and weighted average number of shares Statutory

2017Statutory

2016

Earnings attributable to owners of the parent – Discontinued operations (£m) Profit for the year 43 20 Number of shares (millions) Weighted average number of shares 1,080 1,077Dilutive effects of shares 4 6 1,084 1,083Earnings per share attributable to owners of the parent – Discontinued operations Basic earnings per share (pence) 3.94 1.85

Diluted earnings per share (pence) 3.93 1.83




Reconciliation of earnings – Continuing operations 2017

£m2016

£m

Earnings – Statutory profit for the year attributable to owners of the parent 257 188Adjustments: – Amortisation of acquired intangible assets and adjustment to acquired deferred income 28 18– Fair value adjustments to debt-related financial instruments (6) (3)– Gain on disposal of subsidiary (3) –– Foreign currency movements on intercompany balances (1) 6– Other M&A activity-related items 22 1– Transformation costs and litigation-related items 73 108– Gain on remeasurement of existing investment in an associate (13) –– Taxation on adjustments (30) (38)Net adjustments 70 92Earnings – underlying profit for the year (before exchange movement) 327 280Exchange movement – 37Taxation on exchange movement – (9)Net exchange movement – 28Earnings – underlying profit for the year (after exchange movement) attributable to owners of the parent 327 308

Reconciliation of earnings – Continuing and discontinued operations 2017

£m2016

£m

Earnings – Statutory profit for the year attributable to owners of the parent 300 208Adjustments: – Amortisation of acquired intangible assets and adjustment to acquired deferred income 28 18– Fair value adjustments to debt-related financial instruments (6) (3)– Gain on disposal of subsidiaries (30) –– Foreign currency movements on intercompany balances (1) 6– Other M&A-related items 22 1– Transformation costs and litigation-related items 73 108– Gain on remeasurement of existing investment in an associate (13) –– Taxation on adjustments (28) (38)Net adjustments 45 92Earnings – underlying profit for the year (before exchange movement) 345 300Exchange movement – 43Taxation on exchange movement – (11)Net exchange movement – 32Earnings – underlying profit for the year (after exchange movement) attributable to owners of the parent 345 332

Exchange movement relates to the retranslation of prior year results to current year exchange rates as shown in the table on page 39 within the financial review.



5 Earnings per share continued

Accounting policy Basic earnings per share is calculated by dividing the profit for the year attributable to owners of the parent by the weighted average number of ordinary shares in issue during the year, excluding those held as treasury shares, which are treated as cancelled.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares, exercisable at the end of the year. The Group has one class of dilutive potential ordinary shares. They are share options granted to employees where the exercise price is less than the average market price of the Company’s ordinary shares during the year.


2017


2016 Underlying

2016 Statutory

2017Statutory

2016

Earnings attributable to owners of the parent – Continuing operations (£m) Profit for the year 327 280 308 257 188 Number of shares (millions) Weighted average number of shares 1,080 1,077 1,077 1,080 1,077Dilutive effects of shares 4 6 6 4 6 1,084 1,083 1,083 1,084 1,083Earnings per share attributable to owners of the parent – Continuing operations Basic earnings per share (pence) 30.28 25.90 28.59 23.86 17.43



2017


2016 Underlying

2016 Statutory

2017Statutory

2016

Earnings attributable to owners of the parent – Continuing and discontinued operations (£m)

Profit for the year 345 300 332 300 208 Number of shares (millions) Weighted average number of shares 1,080 1,077 1,077 1,080 1,077Dilutive effects of shares 4 6 6 4 6 1,084 1,083 1,083 1,084 1,083Earnings per share attributable to owners of the parent – Continuing and discontinued operations Basic earnings per share (pence) 31.90 27.84 30.82 27.80 19.28


Reconciliations of the earnings and weighted average number of shares Statutory

2017Statutory

2016

Earnings attributable to owners of the parent – Discontinued operations (£m) Profit for the year 43 20 Number of shares (millions) Weighted average number of shares 1,080 1,077Dilutive effects of shares 4 6 1,084 1,083Earnings per share attributable to owners of the parent – Discontinued operations Basic earnings per share (pence) 3.94 1.85

Diluted earnings per share (pence) 3.93 1.83


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Operating assets and liabilities


6 Intangible assets

This note provides details of the non-physical assets used by the Group to generate revenues and profits. These assets include items such as goodwill, and other intangible assets such as brands, customer relationships, computer software, in-process R&D and technology which have predominantly been acquired as part of business combinations. These assets are initially measured at fair value, which is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.

Goodwill represents the excess of the amount paid to acquire a business over the fair value of the identifiable net assets of that business at the acquisition date.

This section also explains the accounting policies applied and the specific judgements and estimates made by the Directors in arriving at the carrying value of these assets.

6.1 Goodwill

Accounting policy Goodwill arising from the acquisition of a subsidiary represents the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the Group’s total identifiable net assets acquired. Goodwill is carried at cost less accumulated impairment losses.

Goodwill previously written off directly to reserves under UK GAAP prior to 1 October 1998 has not been reinstated and is not recycled to the income statement on the disposal of the business to which it relates.

Goodwill is tested for impairment annually and when circumstances indicate that it may be impaired. Impairment is determined by assessing the recoverable amount of each CGU to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised.

Goodwill is allocated to CGUs expected to benefit from the synergies of the combination and the allocation represents the lowest level at which goodwill is monitored.

Note 2017

£m2016 £m

Cost at 1 October 1,773 1,526– Additions 16.1 593 –– Disposals 16.3 (189) –– Exchange movement (41) 247At 30 September 2,136 1,773 Impairment at 1 October 114 80– Exchange movement (1) 34At 30 September 113 114 Net book amount at 30 September 2,023 1,659

Goodwill additions relate to the acquisitions of Intacct Corporation (£523m) and Sage People Limited (formerly Fairsail Limited) (£70m). See note 16.1 for further details.

Goodwill disposed related to North American Payments business. See note 16.3 for details.




Cash Generating Units The following table shows the allocation of the carrying value of goodwill at the end of the reporting period by CGU:

2017 £m

2016 £m

France 222 218UK & Ireland 251 181Spain 128 125Sage Pay Europe 26 25Germany 38 38Switzerland 39 40Poland 7 7Portugal 6 6North America – Sage Business Solutions Division (SBS) 717 741– Sage Intacct 516 –– Sage Payment Solutions Division (SPS) – 193South Africa 30 43Australia 25 23Asia 18 19 2,023 1,659

Singapore (2016: £5m) and Malaysia (2016: £14m) are now a single CGU referred to as “Asia” as these businesses are now operationally managed together serving a number of Asian markets. This is the level at which goodwill is monitored.

Annual goodwill impairment tests The recoverable amount of a CGU is determined as the higher of its fair value less costs of disposal and its value in use. In determining value in use, estimated future cash flows are discounted to their present value. The Group performed its annual test for impairment on 30 June 2017. In all cases, the 2018 budget and the approved Group plan for the three years following the current financial year form the basis for the cash flow projections for a CGU. Beyond the three-year plan these projections are extrapolated using an estimated long-term growth rate. The key assumptions in the value in use calculations are the average medium-term revenue growth rates and the long-term growth rates of net operating cash flows.

– The average medium-term revenue growth rates represent the compound annual revenue growth for the first five (2016: five) years. The average medium-term revenue growth rate applied to CGUs reflects the specific rates for each territory.

– Long-term growth rates of net operating cash flows are assumed to be equal to the long-term growth rate in the gross domestic product of the country in which the CGUs operations are undertaken reflecting the specific rates for each territory.

Range of rates used across the different CGUs 2017 2016

– Average medium-term revenue growth rates* 4%-13% 1%-14%– Long-term growth rates to net operating cash flows 1%-4% 1.0%-3.5%

Note:

* Average medium-term revenue growth rate is calculated on value in use projections that exclude intercompany revenue.



6 Intangible assets

This note provides details of the non-physical assets used by the Group to generate revenues and profits. These assets include items such as goodwill, and other intangible assets such as brands, customer relationships, computer software, in-process R&D and technology which have predominantly been acquired as part of business combinations. These assets are initially measured at fair value, which is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.

Goodwill represents the excess of the amount paid to acquire a business over the fair value of the identifiable net assets of that business at the acquisition date.

This section also explains the accounting policies applied and the specific judgements and estimates made by the Directors in arriving at the carrying value of these assets.

6.1 Goodwill

Accounting policy Goodwill arising from the acquisition of a subsidiary represents the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the Group’s total identifiable net assets acquired. Goodwill is carried at cost less accumulated impairment losses.

Goodwill previously written off directly to reserves under UK GAAP prior to 1 October 1998 has not been reinstated and is not recycled to the income statement on the disposal of the business to which it relates.

Goodwill is tested for impairment annually and when circumstances indicate that it may be impaired. Impairment is determined by assessing the recoverable amount of each CGU to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised.

Goodwill is allocated to CGUs expected to benefit from the synergies of the combination and the allocation represents the lowest level at which goodwill is monitored.

Note 2017

£m2016 £m

Cost at 1 October 1,773 1,526– Additions 16.1 593 –– Disposals 16.3 (189) –– Exchange movement (41) 247At 30 September 2,136 1,773 Impairment at 1 October 114 80– Exchange movement (1) 34At 30 September 113 114 Net book amount at 30 September 2,023 1,659

Goodwill additions relate to the acquisitions of Intacct Corporation (£523m) and Sage People Limited (formerly Fairsail Limited) (£70m). See note 16.1 for further details.

Goodwill disposed related to North American Payments business. See note 16.3 for details.


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Operating assets and liabilities continued


6 Intangible assets continued 6.1 Goodwill continued

In accordance with IAS 36, key assumptions for the value in use calculations are disclosed for those CGUs where significant goodwill is held. These are deemed by management to be CGUs holding more than 10% of total goodwill. The discount rate, average medium-term revenue growth rate and long-term growth rate assumptions used for the value in use calculation for the significant goodwill CGUs covered by the annual impairment test are shown below:

2017

Local discount

rate (post-tax)

Approximate local

discount rate (pre-tax)

equivalent

Long-term growth

rate

Average medium-term revenue growth rate*

– UKI 8.6% 10.0% 2.1% 6.8%– France 8.1% 10.8% 1.7% 5.5%– North America − SBS 9.2% 14.4% 1.9% 6.4%

2016

Local discount

rate (post tax)

Approximate local


equivalent Long-term

growth rate

Average medium-term revenuegrowth rate*

– UKI 8.8% 10.3% 2.1% 6.1%– France 8.0% 11.4% 1.8% 6.3%– North America − SBS 9.0% 14.1% 1.9% 7.4%– North America − SPS 9.0% 14.3% 1.9% 1.3%

Note:


Discount rate The Group uses a discount rate based on a local Weighted Average Cost of Capital (“WACC”) for each CGU, applying local government yield bonds and tax rates to each CGU on a geographical basis. The discount rate applied to a CGU represents a post-tax rate that reflects the market assessment of the time value of money at the end of the Q3 2017 and the risks specific to the CGU. The post-tax discount rates applied to CGUs were in the range of 6.91% (2016: 6.96%) to 15.34% (2016: 14.67%), reflecting the specific rates for each territory.

Sensitivity analysis A sensitivity analysis was performed for each of the significant CGUs and management concluded that no reasonably possible change in any of the key assumptions would cause the carrying value of any CGU to exceed its recoverable amount.

Impairment charge The Group performed its annual test for impairment on 30 June 2017. The recoverable amount exceeded the carrying value for each CGU.

Sage Intacct Subsequent to the annual impairment test on 30 June 2017, the Group acquired 100% of the share capital of Intacct Corporation resulting in significant goodwill of £516m on 30 September 2017. Management assessed whether there would be any triggering event or indicator that could lead to an impairment of the goodwill acquired through the Intacct Corporation acquisition and concluded that there were no indicators that the fair value of Sage Intacct is lower than the amount paid by Sage. See note 16.1 for details.




6.2 Other intangibles

Accounting policy Intangible assets arising on business combinations are recognised initially at cost, which is their fair value at the date of acquisition. Subsequently they are carried at cost less accumulated amortisation and impairment charges. The main intangible assets recognised are brands, technology, in-process R&D, computer software and customer relationships.

Amortisation is charged to the income statement on a straight-line basis over their estimated useful lives.

The estimated useful lives are as follows:

Brand names – 1 to 20 years Technology/In process R&D (“IPR&D”) – 3 to 7 years Customer relationships – 4 to 15 years Computer software – 2 to 7 years

Other intangible assets that are acquired by the Group are stated at cost, which is the asset’s purchase price and any directly attributable costs of preparing the asset for its intended use, less accumulated amortisation and impairment losses if applicable. Software assets are amortised on a straight-line basis over their estimated useful lives, which do not exceed seven years.

The carrying value of intangibles is reviewed for impairment whenever events indicate that the carrying value may not be recoverable.

Internally-generated software development costs qualify for capitalisation when the Group can demonstrate all of the following:

– The technical feasibility of completing the intangible asset so that it will be available for use or sale; – Its intention to complete the intangible asset and use or sell it; – Its ability to use or sell the intangible asset; – How the intangible asset will generate probable future economic benefits; – The existence of a market or, if it is to be used internally, the usefulness of the intangible asset; – The availability of adequate technical, financial and other resources to complete the development and to use or sell the

intangible asset; – Its ability to measure reliably the expenditure attributable to the intangible asset during development. Generally, commercial viability of new products is not proven until all high-risk development issues have been resolved through testing pre-launch versions of the product. As a result, technical feasibility is proven only after completion of the detailed design phase and formal approval, which occurs just before the products are ready to go to market. Accordingly, development costs have not been capitalised. However, the Group continues to assess the eligibility of development costs for capitalisation on a project-by-project basis.

Costs which are incurred after the general release of internally-generated software or costs which are incurred in order to enhance existing products are expensed in the period in which they are incurred and included within research and development expense in the financial statements.

Brands

£mTechnology

£m

Internal IPR&D

£m

Computer software

£m

Customer relationships

£mTotal

£m

Cost at 1 October 2016 41 127 4 93 147 412– Additions – – – 22 – 22– Acquisitions 1 78 – – 106 185– Disposal of subsidiaries – (8) – (1) (66) (75)– Disposals – – – (7) – (7)– Exchange movement – (2) – (1) – (3)At 30 September 2017 42 195 4 106 187 534Accumulated amortisation at 1 October 2016 31 96 4 62 110 303– Charge for the year 2 14 – 13 7 36– Disposal of subsidiaries – (8) – (1) (65) (74)– Disposals – – – (6) – (6)– Exchange movement – – – (1) 2 1At 30 September 2017 33 102 4 67 54 260 Net book amount at 30 September 2017 9 93 – 39 133 274



6 Intangible assets continued 6.1 Goodwill continued

In accordance with IAS 36, key assumptions for the value in use calculations are disclosed for those CGUs where significant goodwill is held. These are deemed by management to be CGUs holding more than 10% of total goodwill. The discount rate, average medium-term revenue growth rate and long-term growth rate assumptions used for the value in use calculation for the significant goodwill CGUs covered by the annual impairment test are shown below:

2017

Local discount

rate (post-tax)

Approximate local


equivalent

Long-term growth

rate

Average medium-term revenue growth rate*

– UKI 8.6% 10.0% 2.1% 6.8%– France 8.1% 10.8% 1.7% 5.5%– North America − SBS 9.2% 14.4% 1.9% 6.4%

2016

Local discount

rate (post tax)

Approximate local


equivalent Long-term

growth rate

Average medium-term revenuegrowth rate*

– UKI 8.8% 10.3% 2.1% 6.1%– France 8.0% 11.4% 1.8% 6.3%– North America − SBS 9.0% 14.1% 1.9% 7.4%– North America − SPS 9.0% 14.3% 1.9% 1.3%

Note:


Discount rate The Group uses a discount rate based on a local Weighted Average Cost of Capital (“WACC”) for each CGU, applying local government yield bonds and tax rates to each CGU on a geographical basis. The discount rate applied to a CGU represents a post-tax rate that reflects the market assessment of the time value of money at the end of the Q3 2017 and the risks specific to the CGU. The post-tax discount rates applied to CGUs were in the range of 6.91% (2016: 6.96%) to 15.34% (2016: 14.67%), reflecting the specific rates for each territory.

Sensitivity analysis A sensitivity analysis was performed for each of the significant CGUs and management concluded that no reasonably possible change in any of the key assumptions would cause the carrying value of any CGU to exceed its recoverable amount.

Impairment charge The Group performed its annual test for impairment on 30 June 2017. The recoverable amount exceeded the carrying value for each CGU.

Sage Intacct Subsequent to the annual impairment test on 30 June 2017, the Group acquired 100% of the share capital of Intacct Corporation resulting in significant goodwill of £516m on 30 September 2017. Management assessed whether there would be any triggering event or indicator that could lead to an impairment of the goodwill acquired through the Intacct Corporation acquisition and concluded that there were no indicators that the fair value of Sage Intacct is lower than the amount paid by Sage. See note 16.1 for details.


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6 Intangible assets continued 6.2 Other intangibles continued

Brands

£mTechnology

£m

Internal IPR&D

£m

Computer software

£m


£mTotal

£m

Cost at 1 October 2015 34 106 6 71 120 337– Additions – 1 – 7 – 8– Acquisitions – – – – 6 6– Disposals – – (2) (1) – (3)– Exchange movement 7 20 – 16 21 64At 30 September 2016 41 127 4 93 147 412Accumulated amortisation at 1 October 2015 24 73 6 40 90 233– Charge for the year 2 9 – 12 6 29– Disposals – – (2) – – (2)– Exchange movement 5 14 – 10 14 43At 30 September 2016 31 96 4 62 110 303 Net book amount at 30 September 2016 10 31 – 31 37 109

All amortisation charges in the year within both continuing and discontinued operations, prior to transfer to discontinued operations, have been charged through selling and administrative expenses.

7 Property, plant and equipment

This note details the physical assets used by the Group to operate the business and generate revenues and profits. Assets are shown at their purchase price less depreciation, which is an expense that is charged over the useful life of these assets to reflect annual usage and wear and tear, and impairment.

Accounting policy Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation on property, plant and equipment is provided on a straight-line basis to write down an asset to its residual value over its useful life as follows:

Freehold buildings – 50 years Long leasehold buildings and improvements – over period of lease Plant and equipment – 2 to 7 years Motor vehicles – 4 years Office equipment – 2 to 7 years

Freehold land is not depreciated.

The property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset’s useful life and the lease term.

An item of property, plant and equipment is reviewed for impairment whenever events indicate that its carrying value may not be recoverable.




Land and buildings

£m

Plant and equipment

£m

Motor vehicles and office

equipment £m

Total £m

Cost at 1 October 2016 93 157 56 306– Additions – 19 11 30– Acquisitions – 5 1 6– Disposals – (57) (9) (66)– Disposal of subsidiaries – (3) (1) (4)– Exchange movement – (1) – (1)At 30 September 2017 93 120 58 271 Accumulated depreciation at 1 October 2016 16 128 39 183– Charge for the year 1 14 7 22– Disposals – (56) (8) (64)– Disposal of subsidiaries – (3) – (3)At 30 September 2017 17 83 38 138 Net book amount at 30 September 2017 76 37 20 133

Land and buildings

£m

Plant and equipment

£m

Motor vehicles and office

equipment £m

Total £m

Cost at 1 October 2015 91 144 54 289– Additions – 16 7 23– Disposals – (17) (12) (29)– Exchange movement 2 14 7 23At 30 September 2016 93 157 56 306 Accumulated depreciation at 1 October 2015 14 113 39 166– Charge for the year 1 16 5 22– Impairment – 5 1 6– Disposals – (17) (12) (29)– Exchange movement 1 11 6 18At 30 September 2016 16 128 39 183 Net book amount at 30 September 2016 77 29 17 123

Assets held under finance leases with a net book value of £nil (2016: £1m) are included in the above tables.

Depreciation expenses relating to both continuing and discontinued operations of £22m (2016: £22m), prior to transfer to discontinued operations, and impairment of £nil (2016: £6m) have been charged through selling and administrative expenses (note 3.2).



6 Intangible assets continued 6.2 Other intangibles continued

Brands

£mTechnology

£m

Internal IPR&D

£m

Computer software

£m


£mTotal

£m

Cost at 1 October 2015 34 106 6 71 120 337– Additions – 1 – 7 – 8– Acquisitions – – – – 6 6– Disposals – – (2) (1) – (3)– Exchange movement 7 20 – 16 21 64At 30 September 2016 41 127 4 93 147 412Accumulated amortisation at 1 October 2015 24 73 6 40 90 233– Charge for the year 2 9 – 12 6 29– Disposals – – (2) – – (2)– Exchange movement 5 14 – 10 14 43At 30 September 2016 31 96 4 62 110 303 Net book amount at 30 September 2016 10 31 – 31 37 109

All amortisation charges in the year within both continuing and discontinued operations, prior to transfer to discontinued operations, have been charged through selling and administrative expenses.

7 Property, plant and equipment

This note details the physical assets used by the Group to operate the business and generate revenues and profits. Assets are shown at their purchase price less depreciation, which is an expense that is charged over the useful life of these assets to reflect annual usage and wear and tear, and impairment.

Accounting policy Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation on property, plant and equipment is provided on a straight-line basis to write down an asset to its residual value over its useful life as follows:

Freehold buildings – 50 years Long leasehold buildings and improvements – over period of lease Plant and equipment – 2 to 7 years Motor vehicles – 4 years Office equipment – 2 to 7 years

Freehold land is not depreciated.

The property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset’s useful life and the lease term.

An item of property, plant and equipment is reviewed for impairment whenever events indicate that its carrying value may not be recoverable.


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8 Investment in an associate

This note presents information about the Group’s investment in its associate, which is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control of those policies. The Group determines whether it has significant influence based on the voting and any other rights it holds as a result of its investment and also any contractual arrangements in place. Normally, if the Group holds over 20% of the voting rights of an entity without having control or joint control of that entity, the investment will be treated as an associate unless it can be clearly demonstrated that this is not the case.

Accounting policy The Group’s investment in its associate is accounted for using the equity method. Under the equity method, the investment is initially measured at cost. Subsequently, the carrying amount is adjusted to recognise changes in the Group’s share of net assets of the associate since the acquisition date. Goodwill relating to the associate is included in the carrying amount of the investment and is not tested for impairment separately. The income statement reflects the Group’s share of the associate’s profit or loss after tax and any non-controlling interests in the subsidiaries of the associate. Any change in the Group’s share of the associate’s other comprehensive income is presented as part of the Group’s other comprehensive income. In addition, when there has been a change recognised directly in the equity of the associate, the Group recognises its share of any such changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate. The aggregate of the Group’s share of profit or loss of the associate is shown on the face of the income statement outside operating profit. The financial statements of the associate are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment. At each reporting date, the Group determines whether there is objective evidence that the investment is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value, and then recognises the loss in the income statement.

At 30 September 2017, the Group had no investments in associates. At 30 September 2016, the Group’s investment in an associate comprised 100% of the C Ordinary Shares of Fairsail Limited (Fairsail). On 17 March 2017, the Group acquired in a business combination the remaining share capital of Fairsail, which subsequently changed its name to Sage People Limited. Details of the acquisition transaction, including the gain recognised on the remeasurement to fair value of the Group’s existing investment at the acquisition date, are set out in note 16.1. The Group’s share of its associate’s total comprehensive income for the period 1 October 2016 to 17 March 2017 was a loss of £1m (2016: £1m loss), comprising losses from continuing operations. The carrying amount of the Group’s investment at 30 September 2016 was £9m.

9 Working capital

This note provides the amounts invested by the Group in working capital balances at the end of the financial year. Working capital is made up of inventories, trade and other receivables and trade and other payables.

Inventories mainly consist of warehouse stock of Sage products, awaiting shipment to business partners or distributors. Trade and other receivables are made up of amounts owed to the Group by customers and amounts that we pay to our suppliers in advance. Trade receivables are shown net of an allowance for bad and doubtful debts. Our trade and other payables are amounts we owe to our suppliers that have been invoiced to us or accrued by us. They also include taxes and social security amounts due in relation to our role as an employer.

This note also gives some additional detail on the age and recoverability of our trade receivables, which provides an understanding of the credit risk faced by the Group as a part of everyday trading. Credit risk is further disclosed in the Directors’ Report.




9.1 Inventories

Accounting policy Inventories are stated at the lower of cost and net realisable value after making allowances for slow moving or obsolete items.

Cost includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. Cost is calculated using the first-in-first-out method.

2017

£m2016

£m

Materials 1 1Finished goods 2 1 3 2

The Group consumed £7m (2016: £9m) of inventories, included in cost of sales, during the year. There was no material write-down of inventories during the current or prior year.

9.2 Trade and other receivables

Accounting policy Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment.

A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables.

Amounts falling due within one year: 2017

£m2016 £m

Trade receivables 415 363Less: provision for impairment of receivables (21) (21)Trade receivables – net 394 342Other receivables 24 42Prepayments and accrued income 48 36 466 420

The Group’s credit risk on trade and other receivables is primarily attributable to trade receivables. The Group has no significant concentrations of credit risk since the risk is spread over a large number of unrelated counterparties.

The Group considers the credit quality of trade and other receivables by geographical location. The Group considers that the carrying value of the trade and other receivables that is disclosed below gives a fair presentation of the credit quality of the assets.

Trade and other receivables (excluding prepayments and accrued income) by geographical location: 2017

£m2016 £m

Northern Europe 126 114Central and Southern Europe 168 149North America 55 64International 69 57 418 384



8 Investment in an associate

This note presents information about the Group’s investment in its associate, which is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control of those policies. The Group determines whether it has significant influence based on the voting and any other rights it holds as a result of its investment and also any contractual arrangements in place. Normally, if the Group holds over 20% of the voting rights of an entity without having control or joint control of that entity, the investment will be treated as an associate unless it can be clearly demonstrated that this is not the case.

Accounting policy The Group’s investment in its associate is accounted for using the equity method. Under the equity method, the investment is initially measured at cost. Subsequently, the carrying amount is adjusted to recognise changes in the Group’s share of net assets of the associate since the acquisition date. Goodwill relating to the associate is included in the carrying amount of the investment and is not tested for impairment separately. The income statement reflects the Group’s share of the associate’s profit or loss after tax and any non-controlling interests in the subsidiaries of the associate. Any change in the Group’s share of the associate’s other comprehensive income is presented as part of the Group’s other comprehensive income. In addition, when there has been a change recognised directly in the equity of the associate, the Group recognises its share of any such changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate. The aggregate of the Group’s share of profit or loss of the associate is shown on the face of the income statement outside operating profit. The financial statements of the associate are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment. At each reporting date, the Group determines whether there is objective evidence that the investment is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value, and then recognises the loss in the income statement.

At 30 September 2017, the Group had no investments in associates. At 30 September 2016, the Group’s investment in an associate comprised 100% of the C Ordinary Shares of Fairsail Limited (Fairsail). On 17 March 2017, the Group acquired in a business combination the remaining share capital of Fairsail, which subsequently changed its name to Sage People Limited. Details of the acquisition transaction, including the gain recognised on the remeasurement to fair value of the Group’s existing investment at the acquisition date, are set out in note 16.1. The Group’s share of its associate’s total comprehensive income for the period 1 October 2016 to 17 March 2017 was a loss of £1m (2016: £1m loss), comprising losses from continuing operations. The carrying amount of the Group’s investment at 30 September 2016 was £9m.

9 Working capital

This note provides the amounts invested by the Group in working capital balances at the end of the financial year. Working capital is made up of inventories, trade and other receivables and trade and other payables.

Inventories mainly consist of warehouse stock of Sage products, awaiting shipment to business partners or distributors. Trade and other receivables are made up of amounts owed to the Group by customers and amounts that we pay to our suppliers in advance. Trade receivables are shown net of an allowance for bad and doubtful debts. Our trade and other payables are amounts we owe to our suppliers that have been invoiced to us or accrued by us. They also include taxes and social security amounts due in relation to our role as an employer.

This note also gives some additional detail on the age and recoverability of our trade receivables, which provides an understanding of the credit risk faced by the Group as a part of everyday trading. Credit risk is further disclosed in the Directors’ Report.


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9 Working capital continued 9.2 Trade and other receivables continued Movements on the Group provision for impairment of trade receivables were as follows:

2017£m

2016 £m

At 1 October 21 18Increase in provision for receivables impairment 14 8Receivables written off during the year as uncollectable (7) (6)Unused amounts reversed (6) (1)Exchange movement (1) 2At 30 September 21 21

In determining the recoverability of a trade receivable, the Group considers the ageing of each receivable and any change in the circumstances of the individual receivables. The Directors believe that there is no further provision required in excess of the provision for impairment of receivables.

The creation and releases of the provision for impaired receivables have been included in selling and administrative expenses in the income statement. Amounts charged to the provision are generally written off when there is no expectation of recovering additional cash.

At 30 September 2017, trade receivables of £30m (2016: £33m) were either partially or fully impaired.

The ageing of these receivables was as follows: 2017

£m2016 £m

Not due – –Less than six months past due 7 14More than six months past due 23 19 30 33

Trade receivables which were past their due date but not impaired at 30 September 2017 were £73m (2016: £53m).


£m2016 £m

Less than six months past due 54 46More than six months past due 19 7 73 53

The maximum exposure to credit risk at the end of the reporting period is the fair value of each class of receivables mentioned above. The Group held no collateral as security. The Directors estimate that the carrying value of trade receivables approximated their fair value.

9.3 Trade and other payables

Accounting policy Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

Trade and other payables can be analysed as follows: 2017

£m2016 £m

Trade payables 38 35Other tax and social security payable 48 43Other payables 28 37Cash held on behalf of customers (see note 13.3) 75 84Accruals 148 151 337 350




10 Provisions

This note provides details of the provisions recognised by the Group, where a liability exists of uncertain timing or amount. The main estimates in this area relate to legal exposure, employee severance, onerous leases and dilapidation charges.

This section also explains the accounting policies applied and the specific judgements and estimates made by the Directors in arriving at the value of these liabilities.

Accounting policy A provision is recognised only when all three of the following conditions are met:

– The Group has a present obligation (legal or constructive) as a result of a past event; – It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and – A reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the present value of the best estimate of the expenditure required to settle the present obligation at the end of the reporting period, i.e. the present value of the amount that the Group would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party.

Restructuring

£mLegal

£m Building

£mOther

£mTotal

£m

At 1 October 2016 19 12 33 3 67– Additional provision in the year 11 4 7 1 23– Provision utilised in the year (9) (2) (7) (1) (19)– Unused amounts reversed – (4) – (1) (5)– Exchange movement – – 1 1 2At 30 September 2017 21 10 34 3 68

Restructuring£m

Legal £m

Building £m

Other£m

Total £m

Maturity profile < 1 year 19 6 10 2 371 – 2 years 2 1 7 – 42 – 5 years – 3 11 1 21> 5 years – – 6 – 6At 30 September 2017 21 10 34 3 68

Restructuring provisions are for the estimated costs of Group restructuring activities, associated with the business transformation and relate mainly to employee severance. These provisions will be utilised as obligations are settled which is generally expected to be within one year.

Legal provisions have been made in relation to ongoing disputes with third parties and other claims against the Group. The ageing of legal provisions is assessed regularly, based upon internal and external legal advice, as required.

Building provisions relate to dilapidation charges and onerous lease commitments. The timing of the cash flows associated with building provisions is dependent on the timing of lease agreement termination.

Other provisions comprise mainly those for the costs of warranty cover provided by the Group in respect of products sold to third parties. The timing of the cash flows associated with warranty provisions is spread over the period of warranty with the majority of the claims expected in the first year.



9 Working capital continued 9.2 Trade and other receivables continued Movements on the Group provision for impairment of trade receivables were as follows:

2017£m

2016 £m

At 1 October 21 18Increase in provision for receivables impairment 14 8Receivables written off during the year as uncollectable (7) (6)Unused amounts reversed (6) (1)Exchange movement (1) 2At 30 September 21 21

In determining the recoverability of a trade receivable, the Group considers the ageing of each receivable and any change in the circumstances of the individual receivables. The Directors believe that there is no further provision required in excess of the provision for impairment of receivables.

The creation and releases of the provision for impaired receivables have been included in selling and administrative expenses in the income statement. Amounts charged to the provision are generally written off when there is no expectation of recovering additional cash.

At 30 September 2017, trade receivables of £30m (2016: £33m) were either partially or fully impaired.


£m2016 £m

Not due – –Less than six months past due 7 14More than six months past due 23 19 30 33

Trade receivables which were past their due date but not impaired at 30 September 2017 were £73m (2016: £53m).


£m2016 £m

Less than six months past due 54 46More than six months past due 19 7 73 53

The maximum exposure to credit risk at the end of the reporting period is the fair value of each class of receivables mentioned above. The Group held no collateral as security. The Directors estimate that the carrying value of trade receivables approximated their fair value.

9.3 Trade and other payables

Accounting policy Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

Trade and other payables can be analysed as follows: 2017

£m2016 £m

Trade payables 38 35Other tax and social security payable 48 43Other payables 28 37Cash held on behalf of customers (see note 13.3) 75 84Accruals 148 151 337 350


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11 Post-employment benefits

This note explains the accounting policies governing the Group’s pension schemes, analyses the deficit on the defined benefit pension scheme and shows how it has been calculated.

The majority of the Group’s employees are members of defined contribution pension schemes. Additionally, the Group operates two small defined benefit schemes in France and Switzerland.

For defined contribution schemes, the Group pays contributions into separate funds on behalf of the employee and has no further obligations to employees. The risks associated with this type of plan are assumed by the member. Contributions paid by the Group in respect of the current period are included within the income statement.

The defined benefit scheme is a pension arrangement under which participating members receive a pension benefit at retirement determined by the scheme rules, salary and length of pensionable service. The income statement charge for the defined benefit scheme is the current/past service cost and the net interest cost which is the change in the net defined benefit liability that arises from the passage of time. The Group underwrites both financial and demographic risks associated with this type of plan.

Accounting policy Obligations under defined contribution schemes are recognised as an operating cost in the income statement as incurred.

The Group also operates a small defined benefit pension scheme in Switzerland and other post-employment benefit schemes in France. The assets of these schemes are held separately from the assets of the Group. Under French legislation, the Group is required to make one-off payments to employees in France who reach retirement age while still in employment. The costs of providing benefits under these schemes are determined using the projected unit credit actuarial valuation method.

The current service cost and gains and losses on settlements and curtailments are included in selling and administrative expenses in the income statement. Past service costs should be recognised on the earlier of the date of the plan amendment and the date the Group recognises restructuring-related costs. Interest on the pension plan assets and the imputed interest on pension plan liabilities are included within selling and administrative expenses in the income statement.

Changes in the post-employment benefit obligation due to experience and changes in actuarial assumptions are included in the statement of comprehensive income in full in the period in which they arise.

The liability recognised in the balance sheet in respect of the defined benefit pension scheme is the present value of the defined benefit obligation and future administration costs at the end of the reporting period, less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximate to the terms of the related pension liability.

The calculation of the defined benefit obligation of a defined benefit plan requires estimation of future events, for example salary and pension increases, inflation and mortality rates. In the event that future experience does not bear out the estimates made in previous years, an adjustment will be made to the plan’s defined benefit obligation in future periods which could have a material effect on the Group.

A sensitivity analysis has been performed on the significant assumptions. The significant assumptions are deemed to be the discount rate and salary increases, as these are most likely to have a material impact on the defined benefit obligations. The analysis has been performed by the independent actuaries.

Pension costs included in the consolidated income statement Note 2017

£m2016 £m

Defined contribution schemes 10 10Defined benefit plans 2 2 3.3 12 12




Defined benefit plans The most recent actuarial valuations of the post-employment benefit plans were performed by KPMG (France) and PwC (Switzerland) during the year for the year ended 30 September 2017.

Weighted average principal assumptions made by the actuaries 2017

%2016

%

Rate of increase in pensionable salaries 2.0 2.0Discount rate 0.9 0.4Inflation assumption 2.0 2.0

Mortality rate assumptions made by the actuaries 2017

years2016

years

Average life expectancy for 65-year-old male 21 21Average life expectancy for 65-year-old female 24 24Average life expectancy for 45-year-old male 40 40Average life expectancy for 45-year-old female 44 44

Amounts recognised in the balance sheet 2017

£m2016 £m

Present value of funded obligations (43) (46)Fair value of plan assets 21 21Net liability recognised in the balance sheet (22) (25)

Major categories of plan assets as a percentage of total plan assets £m 2017

% £m2016

%

Bonds (quoted) 7 34 8 40Equities (quoted) 7 33 5 24Other (unquoted) 7 33 7 36 21 100 20 100

Expected contributions to post-employment benefit plans for the year ending 30 September 2018 are £1m (2016: expected contributions year ending 30 September 2017: £1m).

Amounts recognised in the income statement 2017

£m2016

£m

Net interest costs on obligation – – Current service cost (2) (2)Total included within staff costs – all within selling and administrative expenses (2) (2)

Changes in the present value of the defined benefit obligation 2017

£m2016 £m

At 1 October (46) (37)Exchange movement 2 (6)Service cost (2) (2)Plan participant contributions (1) (1)Interest cost – – Benefits paid 2 2Actuarial gain – demographic assumptions – 1Actuarial gain/(loss) – financial assumptions 2 (4)Actuarial gain – experience – 1At 30 September (43) (46)



11 Post-employment benefits

This note explains the accounting policies governing the Group’s pension schemes, analyses the deficit on the defined benefit pension scheme and shows how it has been calculated.

The majority of the Group’s employees are members of defined contribution pension schemes. Additionally, the Group operates two small defined benefit schemes in France and Switzerland.

For defined contribution schemes, the Group pays contributions into separate funds on behalf of the employee and has no further obligations to employees. The risks associated with this type of plan are assumed by the member. Contributions paid by the Group in respect of the current period are included within the income statement.

The defined benefit scheme is a pension arrangement under which participating members receive a pension benefit at retirement determined by the scheme rules, salary and length of pensionable service. The income statement charge for the defined benefit scheme is the current/past service cost and the net interest cost which is the change in the net defined benefit liability that arises from the passage of time. The Group underwrites both financial and demographic risks associated with this type of plan.

Accounting policy Obligations under defined contribution schemes are recognised as an operating cost in the income statement as incurred.

The Group also operates a small defined benefit pension scheme in Switzerland and other post-employment benefit schemes in France. The assets of these schemes are held separately from the assets of the Group. Under French legislation, the Group is required to make one-off payments to employees in France who reach retirement age while still in employment. The costs of providing benefits under these schemes are determined using the projected unit credit actuarial valuation method.

The current service cost and gains and losses on settlements and curtailments are included in selling and administrative expenses in the income statement. Past service costs should be recognised on the earlier of the date of the plan amendment and the date the Group recognises restructuring-related costs. Interest on the pension plan assets and the imputed interest on pension plan liabilities are included within selling and administrative expenses in the income statement.

Changes in the post-employment benefit obligation due to experience and changes in actuarial assumptions are included in the statement of comprehensive income in full in the period in which they arise.

The liability recognised in the balance sheet in respect of the defined benefit pension scheme is the present value of the defined benefit obligation and future administration costs at the end of the reporting period, less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximate to the terms of the related pension liability.

The calculation of the defined benefit obligation of a defined benefit plan requires estimation of future events, for example salary and pension increases, inflation and mortality rates. In the event that future experience does not bear out the estimates made in previous years, an adjustment will be made to the plan’s defined benefit obligation in future periods which could have a material effect on the Group.

A sensitivity analysis has been performed on the significant assumptions. The significant assumptions are deemed to be the discount rate and salary increases, as these are most likely to have a material impact on the defined benefit obligations. The analysis has been performed by the independent actuaries.

Pension costs included in the consolidated income statement Note 2017

£m2016 £m

Defined contribution schemes 10 10Defined benefit plans 2 2 3.3 12 12


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11 Post-employment benefits continued Changes in the fair value of plan assets

2017£m

2016 £m

At 1 October 21 18Exchange movement (2) 3Interest income – –Employer’s contributions 1 1Plan participant contributions 1 1Benefits paid (2) (2)Actuarial gain on plan assets 2 – At 30 September 21 21

Analysis of the movement in the balance sheet liability 2017

£m2016 £m

At 1 October (25) (19)Exchange movement – (3)Total expense as recognised in the income statement (2) (2)Contributions paid 1 1Actuarial gain/(loss) 4 (2)At 30 September (22) (25)

Sensitivity analysis on significant actuarial assumptions 2017

£m2016

£m

Discount rate applied to scheme obligations +/- 0.5% pa 2 3Salary increases +/- 0.5% pa 1 1

12 Deferred income tax

Deferred income tax is an accounting adjustment to provide for tax that is expected to arise in the future due to differences in the carrying value of assets and liabilities and their respective tax bases. In this note we outline the accounting policies, movements in the year on the deferred tax account and the net deferred tax asset or liability at the year end.

A deferred tax asset represents a tax reduction that is expected to arise in a future period.

A deferred tax liability represents taxes which will become payable in a future period as a result of a current or an earlier transaction.

Accounting policy Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised based on tax rates that have been enacted or substantively enacted at the end of the reporting period.

Tax assets and liabilities are offset when there is a legally enforceable right and there is an intention to settle the balances net.




The movement on the deferred tax account is as shown below: 2017

£m2016 £m

At 1 October 45 27Income statement credit 5 7Acquisition of subsidiaries (29) –Disposal of subsidiaries (6) –Exchange movement 2 6Other comprehensive income/equity movement in deferred tax (2) 5At 30 September 15 45

The proposed US tax reform bill was released on 2 November 2017. Amongst other detailed provisions, if enacted in its current form, the bill would reduce the US Federal tax rate to 20% (from its current rate of 35%), introduce interest restrictions as well as eliminating certain innovation incentives. As this has not yet been enacted, the potential impact of the changes have not been reflected in the FY17 deferred tax balances.

On 27 September 2017, the French Finance Bill 2018 was released which announced a graduated reduction of the corporate income tax rate to 25% by 2022, resulting in an effective rate of 25.8% including the social surcharge. This Finance Bill was not substantively enacted at the balance sheet date and accordingly French tax balances expected to unwind from 2018 onwards have not been remeasured. The impact of this amendment is expected to be small.

Deferred tax assets have been recognised in respect of tax losses and other temporary differences giving rise to deferred tax assets because it is probable that these assets will be recovered. Each of these assets are reviewed to ensure there is sufficient evidence to support their recognition.

In particular, there are tax losses carried forward in respect of Brazilian entities generating a potential net tax asset of £23m. An element of this asset has been recognised in the financial statements (£12m) with the remainder of the asset being unrecognised (£11m). Whilst the relevant entities have suffered a loss in the current period, there is sufficient supporting evidence of future profitability which is available to allow for the recognition of this asset. This evidence includes detailed financial projections for each individual entity as adjusted for tax sensitive items.

As noted above, a potential deferred tax asset on losses of £11m (2016: £15m) has not been recognised as it is not expected that these losses will be recovered in the foreseeable future. As well as these Brazilian losses, there are other unrecognised deferred tax assets of £6m which are not expected to be recovered in the foreseeable future.

The movements in deferred tax assets and liabilities (prior to the offsetting of balances within the same jurisdiction as permitted by IAS 12, “Income Taxes” during the year are shown below. The offsetting of these balances is shown within the reclassification line of the notes below. Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances net.

Deferred tax assets and liabilities categorised as “other deferred tax” of £34m (2016: £49m) includes various balances in relation to accounting provisions/accruals (asset £38m) (2016: £37m), goodwill amortisation (liability £30m) (2016: £18m), deferred revenue (asset £16m) (2016: £19m) and other sundry amounts (asset £10m) (2016: £11m).



11 Post-employment benefits continued Changes in the fair value of plan assets

2017£m

2016 £m

At 1 October 21 18Exchange movement (2) 3Interest income – –Employer’s contributions 1 1Plan participant contributions 1 1Benefits paid (2) (2)Actuarial gain on plan assets 2 – At 30 September 21 21

Analysis of the movement in the balance sheet liability 2017

£m2016 £m

At 1 October (25) (19)Exchange movement – (3)Total expense as recognised in the income statement (2) (2)Contributions paid 1 1Actuarial gain/(loss) 4 (2)At 30 September (22) (25)

Sensitivity analysis on significant actuarial assumptions 2017

£m2016

£m

Discount rate applied to scheme obligations +/- 0.5% pa 2 3Salary increases +/- 0.5% pa 1 1

12 Deferred income tax

Deferred income tax is an accounting adjustment to provide for tax that is expected to arise in the future due to differences in the carrying value of assets and liabilities and their respective tax bases. In this note we outline the accounting policies, movements in the year on the deferred tax account and the net deferred tax asset or liability at the year end.

A deferred tax asset represents a tax reduction that is expected to arise in a future period.

A deferred tax liability represents taxes which will become payable in a future period as a result of a current or an earlier transaction.

Accounting policy Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised based on tax rates that have been enacted or substantively enacted at the end of the reporting period.

Tax assets and liabilities are offset when there is a legally enforceable right and there is an intention to settle the balances net.


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12 Deferred income tax continued All underlying temporary differences arising from investments in subsidiaries and associates have been appropriately recognised where it is probable the temporary difference will reverse in the foreseeable future.

Deferred tax assets

Intangible assets

£m

Tax losses

£m Other

£mTotal

£m

At 1 October 2016 (8) 5 61 58Income statement credit 2 6 (3) 5Reclassification to deferred tax liability 1 – (4) (3)Other comprehensive income/equity movement in deferred tax – – – –Exchange movement – 1 – 1At 30 September 2017 (5) 12 54 61 Deferred tax liabilities

At 1 October 2016 (19) 18 (12) (13)Income statement credit/(debit) 6 (5) (1) –Reclassification from deferred tax asset (1) – 4 3Acquisition/disposal (53) 28 (10) (35)Other comprehensive income/equity movement in deferred tax – – (2) (2)Exchange movement 2 (2) 1 1At 30 September 2017 (65) 39 (20) (46) Net deferred tax asset at 30 September 2017 (70) 51 34 15

Deferred tax assets

Intangible assets

£m

Tax losses

£m Other

£mTotal

£m

At 1 October 2015 (4) 3 35 34Income statement credit 4 1 7 12Reclassification to deferred tax liability (7) – 5 (2)Other comprehensive income/equity movement in deferred tax – – 5 5Exchange movement (1) 1 9 9At 30 September 2016 (8) 5 61 58 Deferred tax liabilities

At 1 October 2015 (13) 18 (13) (8)Income statement credit/(debit) 4 (4) (5) (5)Reclassification from deferred tax asset (7) 1 8 2Exchange movement (3) 3 (2) (2)At 30 September 2016 (19) 18 (12) (13) Net deferred tax (liability)/asset at 30 September 2016 (27) 23 49 45



Net debt and capital structure


13 Cash flow and net debt

This note analyses our operational cash generation, shows the movement in our net debt in the year, and explains what is included within our cash balances and borrowings at the year end.

Cash generated from operations is the starting point of our cash flow statement on page 123. This section outlines the adjustments for any non-cash accounting items to reconcile our accounting profit for the year to the amount of cash we generated from our operations.

Net debt represents the amount of cash held less borrowings, overdrafts, finance lease payments due and cash held on behalf of customers.

Borrowings are mostly made up of fixed-term external debt which the Group has taken out in order to finance acquisitions in the past.

13.1 Cash flow generated from continuing operations

Reconciliation of profit for the year to cash generated from continuing operations 2017

£m2016 £m

Profit for the year 257 188Adjustments for: – Income tax 85 54– Finance income (10) (5)– Finance costs 28 29– Share of loss of an associate 1 1– Amortisation and impairment of intangible assets 36 28– Depreciation and impairment of property, plant and equipment 22 28– R&D tax credits (1) (1)– Equity-settled share-based transactions 11 8– Gain on re-measurement of existing investment in an associate (13) –– Gain on disposal of subsidiary (3) –– Exchange movement 1 – Changes in working capital (excluding effects of acquisitions and disposals of subsidiaries): – Increase in inventories (1) –– Increase in trade and other receivables (46) (51)– Increase in trade and other payables 4 45– Increase in deferred income 32 36Cash generated from continuing operations 403 360

13.2 Net debt

Reconciliation of net cash flow to movement in net debt (inclusive of finance leases) 2017

£m2016 £m

Decrease in cash in the year (pre-exchange movements) (20) (23)Cash (outflow)/inflow from movement in loans, finance leases and cash held on behalf of customers (396) 133Change in net debt resulting from cash flows (416) 110Acquisitions (9) (17)Disposals (3) –Non-cash movements – (1)Exchange movement 13 (65)Movement in net debt in the year (415) 27Net debt at 1 October (398) (425)Net debt at 30 September (813) (398)



12 Deferred income tax continued All underlying temporary differences arising from investments in subsidiaries and associates have been appropriately recognised where it is probable the temporary difference will reverse in the foreseeable future.

Deferred tax assets

Intangible assets

£m

Tax losses

£m Other

£mTotal

£m

At 1 October 2016 (8) 5 61 58Income statement credit 2 6 (3) 5Reclassification to deferred tax liability 1 – (4) (3)Other comprehensive income/equity movement in deferred tax – – – –Exchange movement – 1 – 1At 30 September 2017 (5) 12 54 61 Deferred tax liabilities

At 1 October 2016 (19) 18 (12) (13)Income statement credit/(debit) 6 (5) (1) –Reclassification from deferred tax asset (1) – 4 3Acquisition/disposal (53) 28 (10) (35)Other comprehensive income/equity movement in deferred tax – – (2) (2)Exchange movement 2 (2) 1 1At 30 September 2017 (65) 39 (20) (46) Net deferred tax asset at 30 September 2017 (70) 51 34 15

Deferred tax assets

Intangible assets

£m

Tax losses

£m Other

£mTotal

£m

At 1 October 2015 (4) 3 35 34Income statement credit 4 1 7 12Reclassification to deferred tax liability (7) – 5 (2)Other comprehensive income/equity movement in deferred tax – – 5 5Exchange movement (1) 1 9 9At 30 September 2016 (8) 5 61 58 Deferred tax liabilities

At 1 October 2015 (13) 18 (13) (8)Income statement credit/(debit) 4 (4) (5) (5)Reclassification from deferred tax asset (7) 1 8 2Exchange movement (3) 3 (2) (2)At 30 September 2016 (19) 18 (12) (13) Net deferred tax (liability)/asset at 30 September 2016 (27) 23 49 45

Net debt and capital structure


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Net debt and capital structure continued


13 Cash flow and net debt continued 13.2 Net debt continued

Analysis of change in net debt (inclusive of finance leases)

At 1 October

2016 £m

Cash flow £m

Acquisitions£m

Disposal of subsidiaries

£m

Non-cash movements

£m

Exchange movement

£m

At 30 September

2017 £m

Cash and cash equivalents 264 (6) – (23) – (4) 231Bank overdrafts (4) (14) – – – – (18)Cash, cash equivalents and bank overdrafts 260 (20) – (23) – (4) 213Loans due within one year (39) 48 (9) – (37) – (37)Loans due after more than one year (535) (435) – – 37 19 (914)Cash held on behalf of customers (84) (9) – 20 – (2) (75)Total (398) (416) (9) (3) – 13 (813)

Included in cash above is £75m (2016: £84m) relating to cash held on behalf of customers. This arises as a consequence of providing payment transaction processing and electronic fund transfer services. The balance represents cash in transit from third parties to Sage customers. Accordingly, a liability for the same amount is included in trade and other payables on the balance sheet and is classified within net debt.

13.3 Cash and cash equivalents (excluding bank overdrafts)

Accounting policy For the purpose of preparation of the consolidated statement of cash flows and the consolidated balance sheet, cash and cash equivalents include cash at bank and in hand and short-term deposits with an original maturity period of three months or less. Bank overdrafts that are an integral part of a subsidiary’s cash management are included in cash and cash equivalents where they have a legal right of set-off and there is an intention to settle net, against positive cash balances, otherwise bank overdrafts are classified as borrowings.

2017

£m2016

£m

Cash at bank and in hand 143 126Cash held on behalf of customers 75 84Short-term bank deposits 13 54 231 264

In line with contractual obligations or Company practice, cash held on behalf of customers is held in separate bank accounts by the Group until such time as these amounts are paid.

The credit risk on liquid funds is considered to be low, as the Board-approved Group treasury policy limits the value that can be invested with each approved counterparty to minimise the risk of loss. The Group policy is to place cash and cash equivalents with counterparties which are well established banks with high credit ratings where available. In some jurisdictions there is limited availability of such counterparties.

At 30 September 2017, 79% (2016: 81%) of the cash and cash equivalents balance was deposited with financial institutions rated at least A3 by Moody’s Investors Service. The investment instruments utilised are money market funds, money market term deposits and bank deposits.

The Group’s maximum exposure to credit risk in relation to cash and cash equivalents is their carrying amount in the balance sheet.




13.4 Borrowings

Accounting policy Assets held under finance leases are initially recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation.

Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of borrowing on an effective interest basis.

Current 2017

£m2016

£m

Bank overdrafts 18 4US senior loan notes – unsecured 37 39 55 43

Non-current 2017

£m2016

£m

Bank loans – unsecured 429 –US senior loan notes – unsecured 485 535 914 535

Included in loans above is £951m (2016: £574m) of unsecured loans (after unamortised issue costs). These borrowings were utilised for acquisitions and managing the Group’s minimum leverage target of 1x net debt to EBITDA.

In the table above, bank loans and loan notes are stated net of unamortised issue costs of £2m (2016: £2m). Unsecured bank loans attract an average interest rate of 1.5%. Loan value

Borrowings Year

issuedInterest coupon Maturity

2017 £m

2016£m

US private placement

– USD 50m loan note 2010 5.15% 11-Mar-17 – 39– USD 50m loan note 2013 2.60% 20-May-18 37 39– USD 150m loan note 2013 3.08% 20-May-20 112 115– USD 150m loan note 2013 3.71% 20-May-23 112 115– USD 50m loan note 2013 3.86% 20-May-25 37 39– EUR 55m loan note 2015 1.89% 26-Jan-22 48 47– EUR 30m loan note 2015 2.07% 26-Jan-23 26 26– USD 200m loan note 2015 3.73% 26-Jan-25 150 154

There were £318m drawings (2016: nil) under the multi-currency revolving credit facility of £603m (2016: £614m) expiring on 26 June 2019, which consists both of US$551.0m (£411m, 2016: £425m) and of €218.0m (£192m, 2016: £189m) tranches.



13 Cash flow and net debt continued 13.2 Net debt continued

Analysis of change in net debt (inclusive of finance leases)

At 1 October

2016 £m

Cash flow £m

Acquisitions£m

Disposal of subsidiaries

£m

Non-cash movements

£m

Exchange movement

£m

At 30 September

2017 £m

Cash and cash equivalents 264 (6) – (23) – (4) 231Bank overdrafts (4) (14) – – – – (18)Cash, cash equivalents and bank overdrafts 260 (20) – (23) – (4) 213Loans due within one year (39) 48 (9) – (37) – (37)Loans due after more than one year (535) (435) – – 37 19 (914)Cash held on behalf of customers (84) (9) – 20 – (2) (75)Total (398) (416) (9) (3) – 13 (813)

Included in cash above is £75m (2016: £84m) relating to cash held on behalf of customers. This arises as a consequence of providing payment transaction processing and electronic fund transfer services. The balance represents cash in transit from third parties to Sage customers. Accordingly, a liability for the same amount is included in trade and other payables on the balance sheet and is classified within net debt.

13.3 Cash and cash equivalents (excluding bank overdrafts)

Accounting policy For the purpose of preparation of the consolidated statement of cash flows and the consolidated balance sheet, cash and cash equivalents include cash at bank and in hand and short-term deposits with an original maturity period of three months or less. Bank overdrafts that are an integral part of a subsidiary’s cash management are included in cash and cash equivalents where they have a legal right of set-off and there is an intention to settle net, against positive cash balances, otherwise bank overdrafts are classified as borrowings.

2017

£m2016

£m

Cash at bank and in hand 143 126Cash held on behalf of customers 75 84Short-term bank deposits 13 54 231 264

In line with contractual obligations or Company practice, cash held on behalf of customers is held in separate bank accounts by the Group until such time as these amounts are paid.

The credit risk on liquid funds is considered to be low, as the Board-approved Group treasury policy limits the value that can be invested with each approved counterparty to minimise the risk of loss. The Group policy is to place cash and cash equivalents with counterparties which are well established banks with high credit ratings where available. In some jurisdictions there is limited availability of such counterparties.

At 30 September 2017, 79% (2016: 81%) of the cash and cash equivalents balance was deposited with financial institutions rated at least A3 by Moody’s Investors Service. The investment instruments utilised are money market funds, money market term deposits and bank deposits.

The Group’s maximum exposure to credit risk in relation to cash and cash equivalents is their carrying amount in the balance sheet.


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14 Financial instruments

This note shows details of the fair value and carrying value of short and long-term borrowings, trade and other payables, trade and other receivables, short-term bank deposits and cash at bank and in hand. These items are all classified as “financial instruments” under accounting standards. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

In order to assist users of these financial statements in making an assessment of any risks relating to financial instruments, this note also shows the ageing of these items and analyses their sensitivity to changes in key inputs, such as interest rates and foreign exchange rates. An explanation of the Group’s exposure to and management of capital, liquidity, credit, interest rate and foreign currency risk is set out in the financial risk management section at the end of this note.

Accounting policy Financial assets and financial liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument.

Financial assets are derecognised when the rights to receive cash flows from the asset have expired, or when the Group has transferred those rights and either has also transferred substantially all the risks and rewards of the asset or has neither transferred nor retained substantially all the risks and rewards of the asset but no longer has control of the asset.

Financial liabilities are derecognised when the obligation specified in the contract is discharged, cancelled or expires.

14.1 Fair values of financial instruments The carrying amounts of the following financial assets and liabilities approximate to their fair values: trade and other payables excluding tax and social security, trade and other receivables excluding prepayments and accrued income, short-term bank deposits and cash at bank and in hand. The fair value of borrowings differs from their carrying amounts due to their bearing interest at fixed rates which are currently higher than floating rates.

The fair value of borrowings is determined by reference to interest rate movements on the US $ private placement market and therefore can be considered as a level 2 fair value as defined within IFRS 13. 2017 2016

NoteBook value

£m Fair value

£m Book value

£mFair value

£m

Long-term borrowing 13.4 (914) (924) (535) (559)Short-term borrowing 13.4 (55) (56) (43) (44)

The carrying amounts of trade receivables (note 9.2) and cash and cash equivalents (note 13.3) represents the Group’s maximum exposure to credit risk.

The Group has a fixed asset investment in an unquoted equity instrument which is classified as an available-for-sale financial asset. The fair value of the instrument is considered to be equivalent to its nominal value as it currently pays a market rate of interest. This is a level 3 fair value as defined within IFRS 13. This investment was acquired during the year as part of the consideration received on the disposal of the Group’s North American Payments business. Further information is given in note 16.3.

14.2 Maturity of financial liabilities The maturity profile of the undiscounted contractual amount of the Group’s financial liabilities at 30 September was as follows:

2017

Borrowings

£m

Trade and other payables

excluding other tax and social

security £m

Total £m

In less than one year 81 291 372In more than one year but not more than two years 453 2 455In more than two years but not more than five years 200 3 203In more than five years 344 – 344 1,078 296 1,374




14.2 Maturity of financial liabilities continued 2016

Borrowings

£m



security£m

Total £m

In less than one year 63 307 370In more than one year but not more than two years 58 4 62In more than two years but not more than five years 161 3 164In more than five years 415 1 416 697 315 1,012

The maturity profile of provisions is disclosed in note 10.

14.3 Borrowing facilities The Group has the following undrawn committed borrowing facilities available at 30 September in respect of which all conditions precedent had been met at that date:

2017£m

2016 £m

Expiring in more than two years but not more than five years 285 614

The facilities have been arranged to help finance the expansion of the Group’s activities. All these facilities incur commitment fees at market rates. In addition, the Group maintains overdraft and uncommitted facilities to provide short-term flexibility and has also utilised the US private placement market.

14.4 Market risk sensitivity analysis Financial instruments affected by market risks include borrowings and deposits.

The following analysis, required by IFRS 7, “Financial Instruments: Disclosures”, is intended to illustrate the sensitivity to changes in market variables, being sterling, US Dollar and Euro interest rates, and sterling/US Dollar and sterling/Euro exchange rates.

The sensitivity analysis assumes reasonable movements in foreign exchange and interest rates before the effect of tax. The Group considers a reasonable interest rate movement in LIBOR to be 1%, based on interest rate history. Similarly, sensitivity to movements in sterling/US Dollar and sterling/Euro exchange rates of 10% are shown, reflecting changes of reasonable proportion in the context of movement in those currency pairs over the last year.

Using the above assumptions, the following table shows the illustrative effect on the consolidated income statement and equity.

2017 2016Income

(losses)/gains £m

Equity (losses)/gains

£m

Income (losses)/gains

£m

Equity (losses)/gains

£m

1% increase in market interest rates (1) (1) (1) (1)1% decrease in market interest rates 1 1 – –10% strengthening of sterling versus the US Dollar (3) (53) (7) (38)10% strengthening of sterling versus the Euro (10) (37) (6) (31)10% weakening of sterling versus the US Dollar 4 59 7 4210% weakening of sterling versus the Euro 11 41 7 34

14.5 The minimum lease payments under finance leases

The minimum lease payments under finance leases fall due as follows: 2017

£m2016

£m

In less than one year – 1In more than one year but not more than five years – – – 1Future finance charges on finance leases – –Present value of finance lease liabilities – 1



14 Financial instruments

This note shows details of the fair value and carrying value of short and long-term borrowings, trade and other payables, trade and other receivables, short-term bank deposits and cash at bank and in hand. These items are all classified as “financial instruments” under accounting standards. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

In order to assist users of these financial statements in making an assessment of any risks relating to financial instruments, this note also shows the ageing of these items and analyses their sensitivity to changes in key inputs, such as interest rates and foreign exchange rates. An explanation of the Group’s exposure to and management of capital, liquidity, credit, interest rate and foreign currency risk is set out in the financial risk management section at the end of this note.

Accounting policy Financial assets and financial liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument.

Financial assets are derecognised when the rights to receive cash flows from the asset have expired, or when the Group has transferred those rights and either has also transferred substantially all the risks and rewards of the asset or has neither transferred nor retained substantially all the risks and rewards of the asset but no longer has control of the asset.

Financial liabilities are derecognised when the obligation specified in the contract is discharged, cancelled or expires.

14.1 Fair values of financial instruments The carrying amounts of the following financial assets and liabilities approximate to their fair values: trade and other payables excluding tax and social security, trade and other receivables excluding prepayments and accrued income, short-term bank deposits and cash at bank and in hand. The fair value of borrowings differs from their carrying amounts due to their bearing interest at fixed rates which are currently higher than floating rates.

The fair value of borrowings is determined by reference to interest rate movements on the US $ private placement market and therefore can be considered as a level 2 fair value as defined within IFRS 13. 2017 2016

NoteBook value

£m Fair value

£m Book value

£mFair value

£m

Long-term borrowing 13.4 (914) (924) (535) (559)Short-term borrowing 13.4 (55) (56) (43) (44)

The carrying amounts of trade receivables (note 9.2) and cash and cash equivalents (note 13.3) represents the Group’s maximum exposure to credit risk.

The Group has a fixed asset investment in an unquoted equity instrument which is classified as an available-for-sale financial asset. The fair value of the instrument is considered to be equivalent to its nominal value as it currently pays a market rate of interest. This is a level 3 fair value as defined within IFRS 13. This investment was acquired during the year as part of the consideration received on the disposal of the Group’s North American Payments business. Further information is given in note 16.3.

14.2 Maturity of financial liabilities The maturity profile of the undiscounted contractual amount of the Group’s financial liabilities at 30 September was as follows:

2017

Borrowings

£m



security £m

Total £m

In less than one year 81 291 372In more than one year but not more than two years 453 2 455In more than two years but not more than five years 200 3 203In more than five years 344 – 344 1,078 296 1,374


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14 Financial instruments continued 14.6 Hedge accounting

Accounting policy A proportion of the Group’s external US Dollar denominated borrowings, and the total of its Euro-denominated borrowings, are designated as a hedge of the net investment in its subsidiaries in the US and Eurozone. The portion of the gain or loss on an instrument used to hedge a net investment in a foreign operation which is determined to be an effective hedge is recognised in other comprehensive income. The ineffective portion is recognised immediately in profit or loss. On disposal of the net investment, the foreign exchange gains and losses on the hedging instrument are recycled to the income statement from equity.

The fair values of the Group’s external US Dollar and Euro-denominated borrowings designated as a hedge at 30 September 2017 were USD 562m and EUR 128m (2016: USD 650m and EUR 85m). These borrowings were used to hedge the Group’s exposure to the USD and EUR foreign exchange risk on its investments in subsidiaries in the US and Eurozone.

On disposal of the North American Payments business, see note 16.3, there was an exchange difference related to hedge instruments recycled through the income statement in portion to the disposed net investment.

14.7 Financial risk management The Group’s exposure to and management of capital, liquidity, credit, interest rate and foreign currency risk are summarised below.

Capital risk The Group’s objectives when managing capital (defined as net debt plus equity) are to safeguard our ability to continue as a going concern in order to provide returns to shareholders and benefits for other stakeholders, while optimising returns to shareholders through an appropriate balance of debt and equity funding. The Group manages its capital structure and makes adjustments to it with respect to changes in economic conditions and our strategic objectives. The Group has set a long-term minimum leverage target of 1x net debt to EBITDA and will work to maintain this going forward.

Liquidity risk The Group manages its exposure to liquidity risk by reviewing cash resources required to meet business objectives through both short and long-term cash flow forecasts. The Company has committed facilities which are available to be drawn for general corporate purposes including working capital. The Treasury function has responsibility for optimising the level of cash across the business.

Credit risk The Group’s credit risk primarily arises from trade and other receivables. The Group has a very low operational credit risk due to the transactions being principally of a high volume, low value and short maturity. The Group has no significant concentration of operational credit risk, with the exposure spread over a large number of counterparties and customers.

The credit risk on liquid funds is considered to be low, as the Board-approved Group treasury policy limits the value that can be invested with each approved counterparty to minimise the risk of loss. All counterparties must meet minimum credit rating requirements.

Interest rate risk The Group is exposed to interest rate risk on floating rate deposits and borrowings. The Group's borrowings comprise principally US private placement loan notes which are at fixed interest rates, and the bank revolving credit facility, which is subject to floating interest rates. At 30 September 2017, the Group had £231m (2016: £264m) of cash and cash equivalents.

The Group regularly reviews forecast debt, cash and cash equivalents and interest rates to monitor this risk. Interest rates on debt and deposits are fixed when management decides this is appropriate.

At 30 September 2017, the Group’s borrowings comprised US private placement loan notes of £522m (2016: £574m), which have an average fixed interest rate of 3.26% (2016: 3.40%); and unsecured bank loans of £429m (2016: £nil), comprising mainly the bank revolving credit facility, which have an average fixed interest rate of 1.5%.

Foreign currency risk Although a substantial proportion of the Group’s revenue and profit is earned outside the UK, operating companies generally only trade in their own currency. The Group is therefore not subject to any significant foreign exchange transactional exposure within these subsidiaries.

The Group’s principal exposure to foreign currency lies in the translation of overseas profits into sterling; this exposure is not hedged.

The Group’s external Euro denominated borrowings and a proportion of its US Dollar borrowings are designated as a hedge of the net investment in its subsidiaries in the US and Eurozone. The foreign exchange movements on translation of the borrowings into sterling have therefore been recognised in the translation reserve. Certain of the Group’s intercompany balances have been identified as part of the Group’s net investment in foreign operations. Foreign exchange effects on these balances that remain on consolidation are also reflected in the translation reserve. The Group’s other currency exposures comprise those currency gains and losses recognised in the income statement, reflecting other monetary assets and liabilities of the Group that are not denominated in the functional currency of the entity involved. At 30 September 2017 and 30 September 2016, these exposures were immaterial to the Group.




15 Equity

This note analyses the movements recorded through shareholders’ equity that are not explained elsewhere in the financial statements, being changes in the amount which shareholders have invested in the Group.

The Group utilises share award schemes as part of its employee remuneration package. Share option schemes for our employees include The Sage Group Performance Share Plan for Directors and senior executives and The Sage Group Savings-related Share Option Plan (the “SAYE Plan”) for all qualifying employees. The Group incurs costs in respect of these schemes in the income statement, which is set out below along with a detailed description of each scheme and the number of options outstanding.

This note also shows the dividends paid in the year and any dividends that are to be proposed and paid post-year end. Dividends are paid as an amount per ordinary share held.

15.1 Ordinary shares

Accounting policy Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds.

Where any Group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the owners of the Company until the shares are cancelled or reissued.

Issued and fully paid ordinary shares of 14/77 pence each 2017

shares2017

£m 2016

shares2016 £m

At 1 October 1,119,480,363 12 1,118,298,748 12Shares issued 1,157,758 – 1,181,615 –At 30 September 1,120,638,121 12 1,119,480,363 12

Issues of ordinary shares Under Executive Share Option Scheme, 199,466 14/77 p ordinary shares were issued during the year for aggregate proceeds of £1m.

Under the Savings-related Share Option Scheme, 914,327 14/77 p ordinary shares were issued during the year for aggregate proceeds of £3m.

15.2 Share-based payments

Accounting policy Equity-settled share-based payments are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the shares that will eventually vest allowing for the effect of non market-based vesting conditions.

Fair value is measured using the Black-Scholes or the Monte Carlo pricing models, based on observable market prices. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

All outstanding Sage Performance Share Plans (“PSPs”) are subject to some non-market performance conditions. These are organic revenue and EPS growth. The element of the income statement charge relating to market performance conditions is fixed at the grant date.

At the end of the reporting period, the Group revises its estimates for the number of options expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

The total charge for the year relating to employee share-based payment plans was £11m (2016: £8m), all of which related to equity-settled share-based payment transactions.

Scheme 2017

£m2016

£m

Performance Share Plan 6 7Restricted Share Plan 2 1Share options 3 –Total 11 8



14 Financial instruments continued 14.6 Hedge accounting

Accounting policy A proportion of the Group’s external US Dollar denominated borrowings, and the total of its Euro-denominated borrowings, are designated as a hedge of the net investment in its subsidiaries in the US and Eurozone. The portion of the gain or loss on an instrument used to hedge a net investment in a foreign operation which is determined to be an effective hedge is recognised in other comprehensive income. The ineffective portion is recognised immediately in profit or loss. On disposal of the net investment, the foreign exchange gains and losses on the hedging instrument are recycled to the income statement from equity.

The fair values of the Group’s external US Dollar and Euro-denominated borrowings designated as a hedge at 30 September 2017 were USD 562m and EUR 128m (2016: USD 650m and EUR 85m). These borrowings were used to hedge the Group’s exposure to the USD and EUR foreign exchange risk on its investments in subsidiaries in the US and Eurozone.

On disposal of the North American Payments business, see note 16.3, there was an exchange difference related to hedge instruments recycled through the income statement in portion to the disposed net investment.

14.7 Financial risk management The Group’s exposure to and management of capital, liquidity, credit, interest rate and foreign currency risk are summarised below.

Capital risk The Group’s objectives when managing capital (defined as net debt plus equity) are to safeguard our ability to continue as a going concern in order to provide returns to shareholders and benefits for other stakeholders, while optimising returns to shareholders through an appropriate balance of debt and equity funding. The Group manages its capital structure and makes adjustments to it with respect to changes in economic conditions and our strategic objectives. The Group has set a long-term minimum leverage target of 1x net debt to EBITDA and will work to maintain this going forward.

Liquidity risk The Group manages its exposure to liquidity risk by reviewing cash resources required to meet business objectives through both short and long-term cash flow forecasts. The Company has committed facilities which are available to be drawn for general corporate purposes including working capital. The Treasury function has responsibility for optimising the level of cash across the business.

Credit risk The Group’s credit risk primarily arises from trade and other receivables. The Group has a very low operational credit risk due to the transactions being principally of a high volume, low value and short maturity. The Group has no significant concentration of operational credit risk, with the exposure spread over a large number of counterparties and customers.

The credit risk on liquid funds is considered to be low, as the Board-approved Group treasury policy limits the value that can be invested with each approved counterparty to minimise the risk of loss. All counterparties must meet minimum credit rating requirements.

Interest rate risk The Group is exposed to interest rate risk on floating rate deposits and borrowings. The Group's borrowings comprise principally US private placement loan notes which are at fixed interest rates, and the bank revolving credit facility, which is subject to floating interest rates. At 30 September 2017, the Group had £231m (2016: £264m) of cash and cash equivalents.

The Group regularly reviews forecast debt, cash and cash equivalents and interest rates to monitor this risk. Interest rates on debt and deposits are fixed when management decides this is appropriate.

At 30 September 2017, the Group’s borrowings comprised US private placement loan notes of £522m (2016: £574m), which have an average fixed interest rate of 3.26% (2016: 3.40%); and unsecured bank loans of £429m (2016: £nil), comprising mainly the bank revolving credit facility, which have an average fixed interest rate of 1.5%.

Foreign currency risk Although a substantial proportion of the Group’s revenue and profit is earned outside the UK, operating companies generally only trade in their own currency. The Group is therefore not subject to any significant foreign exchange transactional exposure within these subsidiaries.

The Group’s principal exposure to foreign currency lies in the translation of overseas profits into sterling; this exposure is not hedged.

The Group’s external Euro denominated borrowings and a proportion of its US Dollar borrowings are designated as a hedge of the net investment in its subsidiaries in the US and Eurozone. The foreign exchange movements on translation of the borrowings into sterling have therefore been recognised in the translation reserve. Certain of the Group’s intercompany balances have been identified as part of the Group’s net investment in foreign operations. Foreign exchange effects on these balances that remain on consolidation are also reflected in the translation reserve. The Group’s other currency exposures comprise those currency gains and losses recognised in the income statement, reflecting other monetary assets and liabilities of the Group that are not denominated in the functional currency of the entity involved. At 30 September 2017 and 30 September 2016, these exposures were immaterial to the Group.


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15 Equity continued 15.2 Share-based payments continued

The Sage Group Performance Share Plan Annual grants of performance shares will normally be made to executive directors and senior executives across the Group after the preliminary declaration of the annual results. Under the Performance Share Plan 3,198,162 (2016: 3,410,056) awards were made during the year.

Awards prior to 2016 These performance shares are subject to a service condition and three performance conditions. Performance conditions are weighted one-third on the achievement of an EPS target, and one-third on the achievement of an organic revenue growth target. The remaining one-third is based on a TSR target.

The EPS vesting percentage is based on compound EPS growth. Where compound EPS growth is between 6% and 12%, the EPS vesting percentage will be calculated on a straight-line pro-rata basis between 6.7% and 26.7%, and where compound EPS growth is between 12% and 15%, the EPS vesting percentage will be calculated on a straight-line pro-rata basis between 26.7% and 33.3%.

The organic revenue growth target is based on the Company’s compound annual organic revenue growth. Where growth is between 4% and 8% the organic revenue growth vesting percentage will be calculated on a straight-line pro-rata basis between 6.7% and 26.7%, and where the Company’s compound organic revenue growth is between 8% and 10%, the organic revenue growth vesting percentage will be calculated on a straight-line pro-rata basis between 26.7% and 33.3%. In order for the organic revenue growth target proportion to vest, the underlying operating profit margin in the financial year of vesting must not be less than that of the underlying operating profit margin for the financial year in which the award is granted.

The final third of the award is the performance target relating to TSR which measures share price performance against a designated comparator group. Where the Company’s TSR is between median and upper quartile, the TSR vesting percentage will be calculated on a straight-line pro-rata basis between 6.7% and 26.7% and where the Company’s TSR is between upper quartile and upper decile, the TSR vesting percentage will be calculated on a straight-line pro-rata basis between 26.7% and 33.3%. The TSR vesting percentage may only exceed 26.7% (“stretch” level) if performance against either the EPS target or the organic revenue growth target is also at “stretch” level.

The comparator group for awards granted prior to 2016 is the companies comprised in the FTSE 100 Index at the start of the performance period, excluding financial services and extraction companies.

Awards were valued using the Monte Carlo option pricing model. The market-based performance condition were included in the fair value calculations, which were based on observable market prices at grant date. All options granted under performance share awards have an exercise price of nil.

Awards from 2016 onwards These performance shares are subject to a service condition and two performance conditions. Performance conditions are weighted one half on the achievement of a revenue growth target and one half on the achievement of a TSR target. The revenue growth target is subject to two underpin performance conditions relating to EPS growth and organic revenue growth.

The revenue growth target is based on the Company’s compound annual recurring revenue growth. Where the Company’s annual recurring revenue growth is between 8% and 10% or 10% and 12%, the extent to which the Revenue Performance Condition is satisfied will be calculated on a straight-line pro rata basis between 10% and 40% or between 40% and 50% respectively. Notwithstanding the extent to which the Revenue Performance Condition has been satisfied, the Revenue Tranche will not be released and will lapse on the Board’s determination that (i) the compound growth of the Company’s underlying EPS over the Performance Period is less than 8% per annum; or (ii) the compound growth of the Company’s organic revenue over the Performance Period is less than 6% per annum.

The performance target relating to TSR measures share price performance against a designated comparator group. Where the Company’s TSR is between median and upper quartile, the TSR vesting percentage will be calculated on a straight-line pro-rata basis between 10% and 40% and where the Company’s TSR is between upper quartile and upper decile, the TSR vesting percentage will be calculated on a straight-line pro-rata basis between 40% and 50%.

The comparator group for awards granted from 2016 onwards is the companies comprised in the FTSE 100 Index at the start of the performance period, excluding financial services and extraction companies.




Awards were valued using the Monte Carlo option pricing model. Performance conditions were included in the fair value calculations, which were based on observable market prices at grant date. All options granted under performance share awards have an exercise price of nil. The fair value per award granted and the assumptions used in the calculation are as follows:

Grant date December

2016August

2017September

2017

Share price at grant date £6.36 £6.86 £7.17Number of employees 84 14 6Shares under award 2,823,124 272,350 102,688Vesting period (years) 3 2 2Expected volatility 21.6% 21.0% 20.9%Award life (years) 3 2 2Expected life (years) 3 2 2Risk-free rate 0.27% 0.24% 0.41%Fair value per award £4.17 £4.38 £4.64

Grant date March

2016June 2016

September2016

Share price at grant date £6.04 £6.04 £7.47Number of employees 94 9 11Shares under award 2,980,575 175,487 253,994Vesting period (years) 3 3 2Expected volatility 21.2% 21.3% 21.3%Award life (years) 3 3 2Expected life (years) 3 3 2Risk-free rate 0.47% 0.32% 0.06%Fair value per award £4.28 £4.28 £5.23

The expected volatility is based on historical volatility over the last three years. The expected life is the average expected period to exercise. The risk-free rate of return is the yield on zero-coupon UK government bonds of a term consistent with the assumed award life.

A reconciliation of award movements over the year is shown below: 2017 2016

Number ‘000s

Weighted average exercise

price £

Number ‘000s


price £

Outstanding at 1 October 10,035 – 13,063 –Awarded 3,198 – 3,410 –Forfeited (3,775) – (3,996) –Exercised (1,831) – (2,442) –Outstanding at 30 September 7,627 – 10,035 –Exercisable at 30 September – – – –

2017 2016

Weighted average

remaining life yearsWeighted average

remaining life yearsRange of exercise prices Expected Contractual Expected Contractual

N/A 1.3 1.3 1.2 1.2




The Sage Group Performance Share Plan Annual grants of performance shares will normally be made to executive directors and senior executives across the Group after the preliminary declaration of the annual results. Under the Performance Share Plan 3,198,162 (2016: 3,410,056) awards were made during the year.

Awards prior to 2016 These performance shares are subject to a service condition and three performance conditions. Performance conditions are weighted one-third on the achievement of an EPS target, and one-third on the achievement of an organic revenue growth target. The remaining one-third is based on a TSR target.

The EPS vesting percentage is based on compound EPS growth. Where compound EPS growth is between 6% and 12%, the EPS vesting percentage will be calculated on a straight-line pro-rata basis between 6.7% and 26.7%, and where compound EPS growth is between 12% and 15%, the EPS vesting percentage will be calculated on a straight-line pro-rata basis between 26.7% and 33.3%.

The organic revenue growth target is based on the Company’s compound annual organic revenue growth. Where growth is between 4% and 8% the organic revenue growth vesting percentage will be calculated on a straight-line pro-rata basis between 6.7% and 26.7%, and where the Company’s compound organic revenue growth is between 8% and 10%, the organic revenue growth vesting percentage will be calculated on a straight-line pro-rata basis between 26.7% and 33.3%. In order for the organic revenue growth target proportion to vest, the underlying operating profit margin in the financial year of vesting must not be less than that of the underlying operating profit margin for the financial year in which the award is granted.

The final third of the award is the performance target relating to TSR which measures share price performance against a designated comparator group. Where the Company’s TSR is between median and upper quartile, the TSR vesting percentage will be calculated on a straight-line pro-rata basis between 6.7% and 26.7% and where the Company’s TSR is between upper quartile and upper decile, the TSR vesting percentage will be calculated on a straight-line pro-rata basis between 26.7% and 33.3%. The TSR vesting percentage may only exceed 26.7% (“stretch” level) if performance against either the EPS target or the organic revenue growth target is also at “stretch” level.

The comparator group for awards granted prior to 2016 is the companies comprised in the FTSE 100 Index at the start of the performance period, excluding financial services and extraction companies.

Awards were valued using the Monte Carlo option pricing model. The market-based performance condition were included in the fair value calculations, which were based on observable market prices at grant date. All options granted under performance share awards have an exercise price of nil.

Awards from 2016 onwards These performance shares are subject to a service condition and two performance conditions. Performance conditions are weighted one half on the achievement of a revenue growth target and one half on the achievement of a TSR target. The revenue growth target is subject to two underpin performance conditions relating to EPS growth and organic revenue growth.

The revenue growth target is based on the Company’s compound annual recurring revenue growth. Where the Company’s annual recurring revenue growth is between 8% and 10% or 10% and 12%, the extent to which the Revenue Performance Condition is satisfied will be calculated on a straight-line pro rata basis between 10% and 40% or between 40% and 50% respectively. Notwithstanding the extent to which the Revenue Performance Condition has been satisfied, the Revenue Tranche will not be released and will lapse on the Board’s determination that (i) the compound growth of the Company’s underlying EPS over the Performance Period is less than 8% per annum; or (ii) the compound growth of the Company’s organic revenue over the Performance Period is less than 6% per annum.

The performance target relating to TSR measures share price performance against a designated comparator group. Where the Company’s TSR is between median and upper quartile, the TSR vesting percentage will be calculated on a straight-line pro-rata basis between 10% and 40% and where the Company’s TSR is between upper quartile and upper decile, the TSR vesting percentage will be calculated on a straight-line pro-rata basis between 40% and 50%.

The comparator group for awards granted from 2016 onwards is the companies comprised in the FTSE 100 Index at the start of the performance period, excluding financial services and extraction companies.


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The Sage Group Restricted Share Plan The Group’s Restricted Share Plan is a long-term incentive plan used in limited circumstances and usually on a one-off basis, under which contingent share awards, other than the award made in December 2013, are usually made only with service conditions. Executive Directors are not permitted to participate in the plan and shares are purchased in the market to satisfy vesting awards. During the year 847,491 (2016: 91,653) awards were made. These awards only have service conditions and their fair values are equal to the share price on the date of grant, ranging from 630-717p.


Number ‘000s


price £

Number ‘000s


price £

Outstanding at 1 October 537 – 1,168 –Awarded 847 – 92 –Forfeited (215) – (389) –Exercised (429) – (334) –Outstanding at 30 September 740 – 537 –Exercisable at 30 September – – – –

2017 2016

Weighted average

remaining life years Weighted average


N/A 1.2 1.2 1.7 1.7

Share options Share options comprise The Sage Global Save and Share Plan (the “Save and Share Plan”) and acquisition options.

The Save and Share Plan is a savings-related share option scheme for employees. For grants made in 2017, the Save and Share Plan was extended so that it was available to employees in the majority of countries in which the Group operates. Previously the Plan had been restricted to UK employees. The UK plan is an HMRC-approved savings-related share option scheme, and similar arrangements apply in other countries where they are available. The fair value of the options is expensed over the service period of three, five or seven years on the assumption that 5% of options will lapse over the service period as employees leave the Group.

In the year, 2,209,518 (2016: none) options were granted under the terms of the Save and Share Plan.

As part of certain acquisitions, the Group awards certain employees with options proportional to previously held options in the company acquired. This amounted to 6,580,801 options being granted in the year with exercise prices ranging from 22-681p. These awards only have service conditions with the fair value portion of the options relating to pre-acquisition services being included as part of the purchase consideration and the remaining fair value of options being expensed over the service period ranging from 1-48 months.





Number ‘000s


price £

Number ‘000s


price £

Outstanding at 1 October – – – –Awarded 6,581 1.85 – –Forfeited (33) 1.39 – –Exercised (6) 1.33 – –Outstanding at 30 September 6,542 1.85 – –Exercisable at 30 September 379 1.87 – –

2017 2016

Weighted average

remaining life yearsWeighted average


22-681p 1.1 7.9 – –

15.3 Other reserves

Translation reserve

£m

Merger reserve

£m

Total other

reserves £m

At 1 October 2015 6 61 67Exchange differences on translating foreign operations 117 – 117Deferred tax credit on foreign currency movements 3 – 3At 30 September 2016 126 61 187Exchange differences on translating foreign operations (26) – (26)Exchange differences recycled through income statement on sale of foreign operations (32) – (32)Deferred tax credit on foreign currency movements 2 – 2At 30 September 2017 70 61 131

Translation reserve The translation reserve represents the accumulated exchange differences arising since the transition to IFRS from the following sources:

– The impact of the translation of subsidiaries with a functional currency other than sterling; and – Exchange differences arising on hedging instruments that are designated hedges of a net investment in foreign operations, net of tax

where applicable.

Exchange differences arising prior to the IFRS transition were offset against retained earnings.

Merger reserve Merger reserve brought forward relates to the merger reserve which was present under UK GAAP and frozen on transition to IFRS.

15.4 Retained earnings

Retained earnings 2017

£m2016

£m

At 1 October 310 242Profit for the year 300 208Actuarial gain/(loss) on post-employment benefit obligations (note 11) 4 (2)Deferred tax charge on actuarial loss on post-employment obligations (1) –Value of employee services net of deferred tax 9 9Value of employee services on acquisition 21 –Purchase of treasury shares (9) (2)Dividends paid to owners of the parent (note 15.5) (157) (145)Total 477 310




The Sage Group Restricted Share Plan The Group’s Restricted Share Plan is a long-term incentive plan used in limited circumstances and usually on a one-off basis, under which contingent share awards, other than the award made in December 2013, are usually made only with service conditions. Executive Directors are not permitted to participate in the plan and shares are purchased in the market to satisfy vesting awards. During the year 847,491 (2016: 91,653) awards were made. These awards only have service conditions and their fair values are equal to the share price on the date of grant, ranging from 630-717p.


Number ‘000s


price £

Number ‘000s


price £

Outstanding at 1 October 537 – 1,168 –Awarded 847 – 92 –Forfeited (215) – (389) –Exercised (429) – (334) –Outstanding at 30 September 740 – 537 –Exercisable at 30 September – – – –

2017 2016

Weighted average

remaining life years Weighted average


N/A 1.2 1.2 1.7 1.7

Share options Share options comprise The Sage Global Save and Share Plan (the “Save and Share Plan”) and acquisition options.

The Save and Share Plan is a savings-related share option scheme for employees. For grants made in 2017, the Save and Share Plan was extended so that it was available to employees in the majority of countries in which the Group operates. Previously the Plan had been restricted to UK employees. The UK plan is an HMRC-approved savings-related share option scheme, and similar arrangements apply in other countries where they are available. The fair value of the options is expensed over the service period of three, five or seven years on the assumption that 5% of options will lapse over the service period as employees leave the Group.

In the year, 2,209,518 (2016: none) options were granted under the terms of the Save and Share Plan.

As part of certain acquisitions, the Group awards certain employees with options proportional to previously held options in the company acquired. This amounted to 6,580,801 options being granted in the year with exercise prices ranging from 22-681p. These awards only have service conditions with the fair value portion of the options relating to pre-acquisition services being included as part of the purchase consideration and the remaining fair value of options being expensed over the service period ranging from 1-48 months.


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15 Equity continued 15.4 Retained earnings continued

Treasury shares Purchase of treasury shares Shares purchased under the Group’s buyback programme are not cancelled but are retained in issue and represent a deduction from equity attributable to owners of the parent. During the year the Group purchased nil shares (2016: nil) and gifted 1,019,166 shares (2016: nil) to the Employee Share Trust.

At 30 September 2017 the Group held 38,503,265 (2016: 39,522,431) of treasury shares.

Employee Share Trust The Group holds treasury shares in a trust which was set up for the benefit of Group employees. The Trust purchases the Company’s shares in the market or is gifted these by the Company for use in connection with the Group’s share-based payments arrangements. The Trust holds 961,715 ordinary shares in the Company (2016: 1,016,311) at a cost of £6m (2016: £nil) and a nominal value of £nil (2016: £nil).

During the year, the Trust agreed to satisfy the vesting of certain share awards, utilising a total of 2,450,345 (2016: 3,006,938) shares held in the Trust. Furthermore, the Trust received additional funds of £9m (2016: £2m) which were used to purchase 1,376,583 (2016: 385,000) shares in the market.

The costs of funding and administering the scheme are charged to the profit and loss account of the Company in the period to which they relate. The market value of the shares at 30 September 2017 was £7m (2016: £8m).

15.5 Dividends

Accounting policy Dividends are recognised through equity when approved by the Company’s shareholders or on payment, whichever is earlier.

2017

£m2016 £m

Final dividend paid for the year ended 30 September 2016 of 9.35p per share 101 –(2016: final dividend paid for the year ended 30 September 2015 of 8.65p per share) – 93 Interim dividend paid for the year ended 30 September 2017 of 5.22p per share 56 –(2016: interim dividend paid for the year ended 30 September 2016 of 4.80p per share) – 52 157 145

In addition, the Directors are proposing a final dividend in respect of the financial year ended 30 September 2017 of 10.20p per share which will absorb an estimated £110m of shareholders’ funds. It will be paid on 2 March 2018 to shareholders who are on the register of members on 9 February 2018. These financial statements do not reflect this dividend payable.



Other notes


16 Acquisitions and disposals

The following note outlines acquisitions and disposals during the year and the accompanying accounting policies. Each acquisition or disposal during the year is discussed and the effects on the results of the Group are highlighted. Additional disclosures are presented for disposals and planned disposals that qualify as businesses held for sale or for presentation as discontinued operations.

Accounting policy Acquisitions:

The acquisition of subsidiaries is accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3, “Business Combinations” are recognised at their fair values at the acquisition date.

Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in the income statement. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity.

Goodwill represents the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the Group’s total identifiable net assets acquired. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the difference is recognised directly in the consolidated income statement. Any subsequent adjustment to reflect changes in consideration arising from contingent consideration amendments is recognised in the consolidated income statement.

On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.

Acquisition-related items such as legal or professional fees are expensed to the income statement as incurred.

The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. The difference between fair value of any consideration paid and the relevant shares acquired of the carrying value of net assets of the subsidiary is recorded in equity.

Where the Group enters into put and call arrangements over shares held by a non-controlling interest, the Group continues to recognise the non-controlling interest until the ownership risks and rewards of those shares transfer to the Group.

Businesses held for sale and discontinued operations:

The Group classifies the assets and liabilities of a business as held for sale if their carrying amounts will be recovered principally through a sale of the business rather than through continuing use. These assets and liabilities are measured at the lower of their carrying amount and fair value less costs to sell. The criteria for classification as held for sale are met only when the sale is highly probable and the business is available for immediate sale in its present condition. Actions required to complete the sale must indicate that it is unlikely that significant changes will be made to the plan or that the decision to sell will be withdrawn. Management must be committed to the sale and completion must be expected within one year from the date of the classification. Property, plant and equipment and intangible assets are not depreciated or amortised once classified as held for sale. Assets and liabilities classified as held for sale are presented separately as current items in the consolidated balance sheet.

A business qualifies as a discontinued operation if it is a component of the Group that either has been disposed of, or is classified as held for sale, and:

– represents a separate major line of business or geographical area of operations; and – is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations.

Discontinued operations are excluded from the results of continuing operations in both the current and prior years and are presented as a single amount in the consolidated income statement as profit or loss on discontinued operations.



15 Equity continued 15.4 Retained earnings continued

Treasury shares Purchase of treasury shares Shares purchased under the Group’s buyback programme are not cancelled but are retained in issue and represent a deduction from equity attributable to owners of the parent. During the year the Group purchased nil shares (2016: nil) and gifted 1,019,166 shares (2016: nil) to the Employee Share Trust.


Employee Share Trust The Group holds treasury shares in a trust which was set up for the benefit of Group employees. The Trust purchases the Company’s shares in the market or is gifted these by the Company for use in connection with the Group’s share-based payments arrangements. The Trust holds 961,715 ordinary shares in the Company (2016: 1,016,311) at a cost of £6m (2016: £nil) and a nominal value of £nil (2016: £nil).



15.5 Dividends

Accounting policy Dividends are recognised through equity when approved by the Company’s shareholders or on payment, whichever is earlier.

2017

£m2016 £m


In addition, the Directors are proposing a final dividend in respect of the financial year ended 30 September 2017 of 10.20p per share which will absorb an estimated £110m of shareholders’ funds. It will be paid on 2 March 2018 to shareholders who are on the register of members on 9 February 2018. These financial statements do not reflect this dividend payable.

Other notes


Strategic reportG


ents

Other notes continued


16 Acquisitions and disposals continued 16.1 Acquisitions Acquisitions made during the current year

Intacct Corporation On 3 August 2017, the Group acquired 100% of the share capital of Intacct Corporation (Intacct) for total consideration of £627m. Intacct is a leading provider of cloud Financial Management Solutions in North America and is incorporated in the USA. Acquiring Intacct strengthens the Group’s position as a leading cloud provider to customers throughout their development from start-up to global enterprise and in the short term provides a further platform for growth, with medium-term aspirations for geographical expansion. The combination of Sage and Intacct’s existing product portfolio, brand, resources and partners, will put the Group in prime position to establish itself as the leading provider of cloud Financial Management Solutions in North America in its chosen segments.

Summary of acquisition £m

Purchase consideration Cash 607Cost of replacement share-based payments 20 627Provisional fair value of identifiable net assets 104Goodwill 523

Cost of replacement share-based payments consists of contingent share awards granted to employees of the acquired business under the Sage Group Restricted Share Plan in place of their existing unvested share option arrangements. The amount treated as consideration is the fair value of awards attributable to pre-acquisition service.

Provisional fair value of identifiable net assets acquired £m

Intangible assets 142Property, plant and equipment 5Cash 2Trade and other receivables 14Other financial assets 1Trade and other payables (10)Deferred income (18)Borrowings (9)Deferred tax liability (23)Provisional fair value of identifiable net assets acquired 104Goodwill 523Total consideration 627

Provisional fair values have been determined as the initial accounting for acquired intangible assets and goodwill is incomplete because of the short period between the acquisition date and the approval of the Annual Report. Goodwill is expected to reflect benefits from the assembled workforce and growth opportunities through customer acquisition and cross-sell to the combined customer base. No goodwill is expected to be deductible for tax purposes.

The outflow of cash and cash equivalents on the acquisition is as follows: £m

Cash consideration 607Cash and cash equivalents acquired (2)Net cash outflow 605

As part of the purchase an additional £5m has been paid in relation to future services.

Costs of £9m directly relating to the completion of the business combination have been included in selling and administrative expenses in the consolidated income statement as other M&A activity-related items and relate to advisory, legal and other professional services.

Arrangements have been put in place for retention payments to remunerate employees of Intacct for future services. The costs of these arrangements will be recognised in future periods over the retention period. The amount recognised to date of £4m is included in selling and administrative expenses in the consolidated income statement as other M&A activity-related items.

The consolidated income statement includes revenue of £8m and a loss after tax of £6m reported by Intacct for the period since the acquisition date. The revenue of the Group for the year ended 30 September 2017 would have increased by £78m and the profit would have reduced by £17m if Intacct had been included in the Group for the whole of the year.




Sage People Limited (formerly Fairsail Limited) On 17 March 2017, the Group obtained control of Fairsail Limited (Fairsail) by acquiring the remaining share capital for a cash consideration of £89m and cost of replacement share-based payments of £1m. This brought the Group’s ownership interest to 100%. Subsequent to the acquisition, Fairsail changed its name to Sage People Limited. Sage People Limited is a leading Human Capital Management (HCM) cloud provider to mid-sized, multinational companies. It is a private entity incorporated in the UK and not listed on any public exchange. The Group became a minority shareholder in 2016 and subsequently launched a shared product, Sage People. Taking full ownership will build on the success of that product, and the resulting combined portfolio provides growth opportunities, particularly through new customer acquisition internationally, and cross-sell to the combined customer base.


Purchase consideration Cash 89Cost of replacement share-based payments 1Fair value of previously held interest 20 110Fair value of identifiable net assets acquired (40)Goodwill 70

Cost of replacement share-based payments consists of contingent share awards granted to employees of the acquired business under the Sage Group Restricted Share Plan in place of their existing unvested share option arrangements. The amount treated as consideration is the fair value of awards attributable to pre-acquisition service. The Group recognised a gain of £13m on the remeasurement to fair value of its existing investment in an associate. This gain is included on a separate line in the consolidated income statement.

Fair value of identifiable net assets acquired £m

Intangible assets 37Cash 10Trade and other debtors 3Trade and other payables (2)Deferred income (3)Deferred tax liability (5)Fair value of identifiable net assets acquired 40Goodwill 70Total consideration 110

When the Group reported its results for the six months ended 31 March 2017, provisional fair values were used for accounting for the acquisition. Subsequently, the accounting has been finalised, resulting in an increase in the fair value of identifiable net assets acquired of £33m, with a corresponding decrease in the amount of goodwill. The increase in net assets acquired relates to the recognition of intangible assets of £37m, a deferred tax liability of £5m and a decrease in the liability for deferred income of £1m. Goodwill reflects benefits from the assembled workforce and growth opportunities through customer acquisition and cross-sell to the combined customer base. No goodwill is expected to be deductible for tax purposes.



Costs totalling less than £1m directly relating to the completion of the business combination have been included in selling and administrative expenses in the consolidated income statement as other M&A activity-related items and relate to advisory, legal and other professional services.

Immediately prior to the acquisition, the Group had recognised prepaid licences of £1m for products purchased from the acquired business by the Group prior to the acquisition. At the acquisition date, the Group recognised a loss equal to the carrying amount of the prepaid licences. The loss is included in selling and administrative expenses in the consolidated income statement as other M&A activity-related items.

Arrangements have been put in place for retention and performance-related payments to remunerate employees of the acquired business for future services. The costs of these arrangements will be recognised over the retention and performance periods. The amount recognised during the year is £2m.

In the period since the acquisition date, the acquired business has reported revenue of £7m and a loss of £5m. The revenue of the Group for the year ended 30 September 2017 would have increased by £12m and the profit would have reduced by £7m if the acquired business had been included in the Group for the whole of the year.



16 Acquisitions and disposals continued 16.1 Acquisitions Acquisitions made during the current year

Intacct Corporation On 3 August 2017, the Group acquired 100% of the share capital of Intacct Corporation (Intacct) for total consideration of £627m. Intacct is a leading provider of cloud Financial Management Solutions in North America and is incorporated in the USA. Acquiring Intacct strengthens the Group’s position as a leading cloud provider to customers throughout their development from start-up to global enterprise and in the short term provides a further platform for growth, with medium-term aspirations for geographical expansion. The combination of Sage and Intacct’s existing product portfolio, brand, resources and partners, will put the Group in prime position to establish itself as the leading provider of cloud Financial Management Solutions in North America in its chosen segments.


Purchase consideration Cash 607Cost of replacement share-based payments 20 627Provisional fair value of identifiable net assets 104Goodwill 523

Cost of replacement share-based payments consists of contingent share awards granted to employees of the acquired business under the Sage Group Restricted Share Plan in place of their existing unvested share option arrangements. The amount treated as consideration is the fair value of awards attributable to pre-acquisition service.

Provisional fair value of identifiable net assets acquired £m

Intangible assets 142Property, plant and equipment 5Cash 2Trade and other receivables 14Other financial assets 1Trade and other payables (10)Deferred income (18)Borrowings (9)Deferred tax liability (23)Provisional fair value of identifiable net assets acquired 104Goodwill 523Total consideration 627

Provisional fair values have been determined as the initial accounting for acquired intangible assets and goodwill is incomplete because of the short period between the acquisition date and the approval of the Annual Report. Goodwill is expected to reflect benefits from the assembled workforce and growth opportunities through customer acquisition and cross-sell to the combined customer base. No goodwill is expected to be deductible for tax purposes.



As part of the purchase an additional £5m has been paid in relation to future services.

Costs of £9m directly relating to the completion of the business combination have been included in selling and administrative expenses in the consolidated income statement as other M&A activity-related items and relate to advisory, legal and other professional services.

Arrangements have been put in place for retention payments to remunerate employees of Intacct for future services. The costs of these arrangements will be recognised in future periods over the retention period. The amount recognised to date of £4m is included in selling and administrative expenses in the consolidated income statement as other M&A activity-related items.

The consolidated income statement includes revenue of £8m and a loss after tax of £6m reported by Intacct for the period since the acquisition date. The revenue of the Group for the year ended 30 September 2017 would have increased by £78m and the profit would have reduced by £17m if Intacct had been included in the Group for the whole of the year.


Strategic reportG


ents



16 Acquisitions and disposals continued 16.1 Acquisitions continued

Startup Compass Inc. On 3 April 2017, the Group acquired 100% of the equity capital of Startup Compass Inc. (Compass), the provider of a highly innovative analytics and benchmarking platform, for cash consideration of £5m, of which £4m has been paid and £1m is deferred for up to two years. The value of net assets acquired was £5m, comprising intangible technology assets of £6m and a deferred tax liability of £1m. No goodwill was recognised. When the Group reported its results for the six months ended 31 March 2017, provisional fair values were used in the disclosure of the transaction as an event after the balance sheet date. The finalisation of the accounting has resulted in an increase in the fair value of identifiable net assets acquired of £5m attributable to intangible assets and deferred tax liabilities (£6m and £1m respectively), with a corresponding decrease in the amount of goodwill.

The intangible assets acquired as part of the above acquisitions is analysed as follows:

Brands £m

Technology £m


£mTotal

£m

Intacct Corporation (provisional) 1 44 97 142Sage People Limited (formerly Fairsail Limited) – 28 9 37Startup Compass Inc. – 6 – 6Total other intangible assets from the acquisition of subsidiaries (note 6.2) 1 78 106 185

16.2 Costs relating to business combinations in the year Costs directly relating to completion of the business combinations in the year of £10m (2016: £1m) have been included in selling and administrative expenses in the consolidated income statement. These acquisition-related items relate to completed transactions and include advisory, legal, accounting, valuation and other professional or consulting services.

16.3 Disposals and discontinued operations Disposals made during the current year

Discontinued operation: North American Payments business

On 1 August 2017, the Group completed the sale of the subsidiaries that formed its North American Payments business (Sage Payment Solutions, or SPS) to GTCR, LLC (GTCR), a leading private equity firm, for total proceeds of £196m, generating a gain on disposal of £25m. The assets and liabilities of SPS were presented as held for sale in the Group’s interim financial statements for the six months ended 31 March 2017, and the business has been presented as a discontinued operation as it is considered to represent a separate major line of business for the Group given the nature of its business and its contribution to the Group’s revenues. Profit from discontinued operations for the period from 1 October 2016 to disposal on 1 August 2017 and for the year ended 30 September 2016 is analysed as follows:

Underlying2017

£m

Adjustments2017

£m

Statutory 2017

£m


2016 £m

Adjustments2016

£m

Statutory2016

£m

Revenue 119 – 119 130 – 130Cost of sales (11) – (11) (12) – (12)Gross profit 108 – 108 118 – 118Selling and administrative expenses (79) – (79) (84) – (84)Operating profit 29 – 29 34 – 34Finance income – – – – – –Finance costs – – – (1) – (1)Profit before income tax 29 – 29 33 – 33Income tax expense (11) – (11) (13) – (13)Profit after income tax 18 – 18 20 – 20Gain on disposal of discontinued operations – 27 27 – – –Tax on disposal – (2) (2) – – –Profit on discontinued operations 18 25 43 20 – 20

Cash flow from discontinued operations is analysed as follows:

Cash flows from: 2017

£m2016

£m

Operating activities 25 38Net proceeds on disposal of business 158 –Financing activities 4 (8) 187 30




The assets and liabilities sold, and the gain on disposal, are analysed as follows:

2017

£m

Assets Goodwill 189Other intangible assets 1Property, plant and equipment 1Trade and other receivables 41Cash and cash equivalents (excluding bank overdrafts) 23Deferred tax assets 6Total assets 261Liabilities Trade and other payables (66)Other liabilities (1)Total liabilities (67)Net assets 194 Gain on disposal Cash consideration received 181Preferred equity consideration 15Gross consideration 196Transaction costs (7)Net consideration 189Net assets disposed (as above) (194)Cumulative foreign exchange differences reclassified from other comprehensive income to the income statement 32Gain on disposal of discontinued operations 27

Preferred equity consideration comprises a senior preferred equity instrument in GTCR-Ultra Holdings, LLC, SPS’s indirect parent entity that is majority-owned by GTCR. The instrument will be held by Sage until paid in full ($20m face value plus any accrued interest thereon), or redeemed by GTCR either voluntarily in its discretion or mandatorily on a change of control of GTCR-Ultra Holdings LLC. This is presented in the balance sheet as a fixed asset investment within non-current assets.

Other disposal

On 6 April 2017, the Group sold its subsidiary Syska GmbH (Syska) for £2m. Net liabilities divested were £1m, resulting in a gain on disposal of £3m. The assets and liabilities of Syska were presented as held for sale in the Group’s interim financial statements for the six months ended 31 March 2017. Prior to disposal, the business formed part of the Group’s Central and Southern Europe reporting segment.

This business is not accounted for as a discontinued operation.

16.4 Assets and liabilities held for sale The assets and liabilities held for sale relate to the Group’s subsidiary Sage XRT Brasil Ltda. The sale is expected to be finalised during the first part of the year ending 30 September 2018. The business forms part of the Group’s International reporting segment. Assets held for sale comprise trade and other receivables of £1m (2016: £1m) and liabilities held for sale comprise trade and other payables of £1m (2016: £nil).

17 Related party transactions

This note provides information about transactions between the Group and its related parties. A group’s related parties include any entities over which it has control, joint control or significant influence, and any persons who are members of its key management personnel.

The Group’s related parties are its subsidiary undertakings, its associated undertaking and its key management personnel, which comprises the Group’s Executive Committee members. The Group has taken advantage of the exemption available under IAS 24, “Related Party Disclosures”, not to disclose details of transactions with its subsidiary undertakings. Compensation paid to the Executive Committee is disclosed in note 3.3.

No related party transactions occurred during the year.

Supplier transactions occurred during the prior year between Sage South Africa (Pty) Ltd, one of the Group’s subsidiary companies, and Ivan Epstein, President, International and Executive Committee member. These transactions related to the lease of four properties in which Ivan Epstein has a minority and indirect shareholding. During the prior year £4m relating to these transactions was charged through selling and administrative expenses. There were no outstanding amounts payable for the year ended 2016.



16 Acquisitions and disposals continued 16.1 Acquisitions continued

Startup Compass Inc. On 3 April 2017, the Group acquired 100% of the equity capital of Startup Compass Inc. (Compass), the provider of a highly innovative analytics and benchmarking platform, for cash consideration of £5m, of which £4m has been paid and £1m is deferred for up to two years. The value of net assets acquired was £5m, comprising intangible technology assets of £6m and a deferred tax liability of £1m. No goodwill was recognised. When the Group reported its results for the six months ended 31 March 2017, provisional fair values were used in the disclosure of the transaction as an event after the balance sheet date. The finalisation of the accounting has resulted in an increase in the fair value of identifiable net assets acquired of £5m attributable to intangible assets and deferred tax liabilities (£6m and £1m respectively), with a corresponding decrease in the amount of goodwill.

The intangible assets acquired as part of the above acquisitions is analysed as follows:

Brands £m

Technology £m


£mTotal

£m

Intacct Corporation (provisional) 1 44 97 142Sage People Limited (formerly Fairsail Limited) – 28 9 37Startup Compass Inc. – 6 – 6Total other intangible assets from the acquisition of subsidiaries (note 6.2) 1 78 106 185

16.2 Costs relating to business combinations in the year Costs directly relating to completion of the business combinations in the year of £10m (2016: £1m) have been included in selling and administrative expenses in the consolidated income statement. These acquisition-related items relate to completed transactions and include advisory, legal, accounting, valuation and other professional or consulting services.

16.3 Disposals and discontinued operations Disposals made during the current year

Discontinued operation: North American Payments business

On 1 August 2017, the Group completed the sale of the subsidiaries that formed its North American Payments business (Sage Payment Solutions, or SPS) to GTCR, LLC (GTCR), a leading private equity firm, for total proceeds of £196m, generating a gain on disposal of £25m. The assets and liabilities of SPS were presented as held for sale in the Group’s interim financial statements for the six months ended 31 March 2017, and the business has been presented as a discontinued operation as it is considered to represent a separate major line of business for the Group given the nature of its business and its contribution to the Group’s revenues. Profit from discontinued operations for the period from 1 October 2016 to disposal on 1 August 2017 and for the year ended 30 September 2016 is analysed as follows:

Underlying2017

£m

Adjustments2017

£m

Statutory 2017

£m


2016 £m

Adjustments2016

£m

Statutory2016

£m

Revenue 119 – 119 130 – 130Cost of sales (11) – (11) (12) – (12)Gross profit 108 – 108 118 – 118Selling and administrative expenses (79) – (79) (84) – (84)Operating profit 29 – 29 34 – 34Finance income – – – – – –Finance costs – – – (1) – (1)Profit before income tax 29 – 29 33 – 33Income tax expense (11) – (11) (13) – (13)Profit after income tax 18 – 18 20 – 20Gain on disposal of discontinued operations – 27 27 – – –Tax on disposal – (2) (2) – – –Profit on discontinued operations 18 25 43 20 – 20

Cash flow from discontinued operations is analysed as follows:

Cash flows from: 2017

£m2016

£m

Operating activities 25 38Net proceeds on disposal of business 158 –Financing activities 4 (8) 187 30


Strategic reportG


ents



17 Related party transactions continued Supplier transactions occurred during the prior year between Sage SP, S.L., one of the Group’s subsidiary companies, and Álvaro Ramírez, who held the role of President, Europe and Executive Committee member during the year. These transactions related to the lease of a property in which Álvaro Ramírez has a minority shareholding. During the prior year £1m relating to these transactions was charged through selling and administrative expenses. There were no outstanding amounts payable for the year ended 2016.

These arrangements were subject to independent review using external advisers to ensure all transactions were at arm’s length.

18 Group undertakings

While we present consolidated results in these financial statements, our structure is such that there are a number of different operating and holding companies that contribute significantly to the overall result.

Our subsidiaries are located around the world and each contributes to the profits, assets and cash flow of the Group.

The entities listed below and on the following page are subsidiaries of the Company or Group. The Group percentage of equity capital and voting rights is 100% for all subsidiaries listed with all shares held being classed as ordinary. The results for all of the subsidiaries have been consolidated within these financial statements. Name Registered address Country Name Registered address CountryACCPAC UK Limited North Park, Newcastle upon Tyne,

NE13 9AA United Kingdom

Sage (UK) Ltd North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Apex Software International Limited

Number One Central Park, Leopardstown, Dublin 18, Ireland

Ireland Sage Alchemex (Pty) Ltd

23A Flanders Drive, Mount Edgecombe, Durban, 4321

South Africa

Apex Software Systems Limited


Ireland Sage Australia Holdings Pty Ltd

Level 11, The Zenith Tower B, 821 Pacific Hwy Chatswood 2067 Australia

Australia

Best Software Germany

Berner Str. 23, D-60437, Frankfurt, Germany

Germany Sage Bäurer AG Platz 10, Root D4, CH-6039, Switzerland

Switzerland

Computer Resources (Research) Limited


Ireland Sage bäurer GmbH Josefstraße 10, 78166 Donauerschingen Germany

Computer Resources (Software) Limited


Ireland Sage Brasil 3 Empreendimentos E Participações Ltda

Rua Antônio Nagib Ibrahim, 350, part A, Água Branca, São Paulo, São Paulo, Postal Code 05036-060

Brazil

Computer Resources (Supplies) Limited


Ireland Sage Brasil Software S.A.

Rodovia Luiz de Queiroz, without number, Nova Americana, Km 127,5, Americana, São Paulo Postal Code 13466-170

Brazil

Computer Resources Limited


Ireland Sage Brazilian Investment One Limited

North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Creative Purpose Sdn Bhd

Suite B13A-4, Tower B, Level 13A, Northpoint Offices, Mid Valley City, No. 1 Medan Syed Putra Utara, 59200 Kuala Lumpur

Malaysia Sage Brazilian Investment Two Limited


United Kingdom

eWare GmbH Behringstraße 24, 90482 Nürnberg, Germany

Germany Sage Business Solutions Pty Ltd


Australia

Handisoft Software Pty Ltd


Australia Sage CRM Solutions GmbH

Emil-von-Behring-Straße 8-14, 60439 Frankfurt am Main

Germany

Intacct Development Romania SRL

21 Decembrie 1989 Blvd, no 77, The Office building, C section, 1st floor, 400604 Cluj-Napoca, Romania

Romania Sage CRM Solutions Limited


United Kingdom

Intacct Software Pvt Limited

3rd Floor, Esteem Arcade, 26/1, Race Course Road, Bangalore, 560 001

India Sage Enterprise Solutions Limited


United Kingdom

IntelligentApps Holdings Limited

Providence House, East Hill Street, Nassau, Bahamas

Bahamas Sage Euro Hedgeco 1 North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Interact UK Holdings Limited*


United Kingdom

Sage Euro Hedgeco 2 North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom




Name Registered address Country Name Registered address CountryIOB Informações Objetivas Publicações Jurídicas Ltda.

Rua Nagib Ibrahim, 350, Água Branca, São Paulo, Postal Code 05036-060

Brazil Sage Far East Investments Limited


United Kingdom

KCS Global Holdings Limited


United Kingdom

Sage Global Services (Ireland) Limited


Ireland

KHK Software AG Platz 10, Root D4, CH-6039, Switzerland Switzerland Sage Global Services Limited


United Kingdom

Multisoft Financial Systems Limited


United Kingdom

Sage Global Services US, Inc

271 17th Street NW, Suite 1100 Atlanta, Georgia 30363

United States

PAI Services, LLC 305 Fellowship Road, Suite 300 Mt. Laurel, New Jersey 08054

United States Sage GmbH Stella-Klein-Löw-Weg 15, 1020 Wien Austria

Pastel Software (Europe) Limited


Ireland Sage GmbH Emil-von-Behring-Straße 8-14, 60439 Frankfurt am Main

Germany

Pastel Software (Ireland) Limited


Ireland Sage Hibernia Investments No.1 Limited


United Kingdom

Protx Group Limited North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage Hibernia Investments No.2 Limited


United Kingdom

Protx Limited North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage Hibernia Limited Number One Central Park, Leopardstown, Dublin 18, Ireland

Ireland

Sage Hibernia Services Limited


Ireland Sage Software East Africa Limited

1st Floor Reliance Centre , Woodvale , Westlands , Lr. 1870/Ix/96,114 & 115, Nairobi

Kenya

Sage Holding Company Limited*


United Kingdom

Sage Software Holdings, Inc.


United States

Sage Holding France SAS

Atrium Defense, Paris la Defense, 10 Place de Belgique, 92250, Le Garenne Colombes, Paris

France Sage Software (India) Private Limited

N-34, Lower Ground Floor, Block M, Rampuri, Kalkaji, New Delhi 110019, India

India

Sage Holdings Limited


United Kingdom

Sage Software International, Inc.


United States

Sage Intacct, Inc. 300 Park Avenue, Suite 1400, San Jose, CA, 95110

United States Sage Software Ltd North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage Irish Finance Company Unlimited Company


Ireland Sage Software Middle East FZ-LLC

116 - 120, Floor: 01, Building: 11, Dubai, UAE United Arab Emirates

Sage Irish Investments LLP


United Kingdom

Sage Software Namibia (Pty) Ltd

34 Nelson Mandela Avenue, Ardeco Building, 1st Floor, Klein Windhoek, Namibia

Namibia

Sage Irish Investments One Limited*


United Kingdom

Sage Software Nigeria Limited

Plot 252E Muri Okunola Street, Victoria Island, Lagos.

Nigeria

Sage Irish Investments Two Limited*


United Kingdom

Sage Software North America


United States

Sage Management & Services GmbH


Germany Sage Software Sdn Bhd


Malaysia

Sage One Pty Limited


Australia Sage Software, Inc 271 17th Street NW, Suite 1100 Atlanta, Georgia 30363

United States

Sage Online Holdings Limited


United Kingdom

Sage South Africa (Pty) Ltd*

102 Western Service Road, Gallo Manor Ext 6, Gallo Manor, 2191, South Africa

South Africa

Sage Overseas Limited (Branch Registration)

Atrium Defense, Paris la Defense, 10 Place de Belgique, 92250, Le Garenne Colombes, Paris

France Sage sp. z o.o Aleje Jerozolimskie 132, 02-305 Warsaw, Poland

Poland

Sage Overseas Limited Sucursal

Paseo Castellana 53, Madrid Spain Sage Spain, S.L. C/ Labastida, 10-12 28034, Madrid, Spain Spain



17 Related party transactions continued Supplier transactions occurred during the prior year between Sage SP, S.L., one of the Group’s subsidiary companies, and Álvaro Ramírez, who held the role of President, Europe and Executive Committee member during the year. These transactions related to the lease of a property in which Álvaro Ramírez has a minority shareholding. During the prior year £1m relating to these transactions was charged through selling and administrative expenses. There were no outstanding amounts payable for the year ended 2016.

These arrangements were subject to independent review using external advisers to ensure all transactions were at arm’s length.

18 Group undertakings

While we present consolidated results in these financial statements, our structure is such that there are a number of different operating and holding companies that contribute significantly to the overall result.

Our subsidiaries are located around the world and each contributes to the profits, assets and cash flow of the Group.

The entities listed below and on the following page are subsidiaries of the Company or Group. The Group percentage of equity capital and voting rights is 100% for all subsidiaries listed with all shares held being classed as ordinary. The results for all of the subsidiaries have been consolidated within these financial statements. Name Registered address Country Name Registered address CountryACCPAC UK Limited North Park, Newcastle upon Tyne,

NE13 9AA United Kingdom

Sage (UK) Ltd North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Apex Software International Limited


Ireland Sage Alchemex (Pty) Ltd

23A Flanders Drive, Mount Edgecombe, Durban, 4321

South Africa

Apex Software Systems Limited


Ireland Sage Australia Holdings Pty Ltd


Australia

Best Software Germany

Berner Str. 23, D-60437, Frankfurt, Germany

Germany Sage Bäurer AG Platz 10, Root D4, CH-6039, Switzerland

Switzerland

Computer Resources (Research) Limited


Ireland Sage bäurer GmbH Josefstraße 10, 78166 Donauerschingen Germany

Computer Resources (Software) Limited


Ireland Sage Brasil 3 Empreendimentos E Participações Ltda

Rua Antônio Nagib Ibrahim, 350, part A, Água Branca, São Paulo, São Paulo, Postal Code 05036-060

Brazil

Computer Resources (Supplies) Limited


Ireland Sage Brasil Software S.A.

Rodovia Luiz de Queiroz, without number, Nova Americana, Km 127,5, Americana, São Paulo Postal Code 13466-170

Brazil

Computer Resources Limited


Ireland Sage Brazilian Investment One Limited


United Kingdom

Creative Purpose Sdn Bhd


Malaysia Sage Brazilian Investment Two Limited


United Kingdom

eWare GmbH Behringstraße 24, 90482 Nürnberg, Germany

Germany Sage Business Solutions Pty Ltd


Australia

Handisoft Software Pty Ltd


Australia Sage CRM Solutions GmbH


Germany

Intacct Development Romania SRL

21 Decembrie 1989 Blvd, no 77, The Office building, C section, 1st floor, 400604 Cluj-Napoca, Romania

Romania Sage CRM Solutions Limited


United Kingdom

Intacct Software Pvt Limited

3rd Floor, Esteem Arcade, 26/1, Race Course Road, Bangalore, 560 001

India Sage Enterprise Solutions Limited


United Kingdom

IntelligentApps Holdings Limited

Providence House, East Hill Street, Nassau, Bahamas

Bahamas Sage Euro Hedgeco 1 North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Interact UK Holdings Limited*


United Kingdom

Sage Euro Hedgeco 2 North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom


Strategic reportG


ents



18 Group undertakings continued Name Registered address Country Name Registered address CountrySage Overseas Limited.


United Kingdom

Sage Technologies Limited


Ireland

Sage Pay (Dublin) Limited


Ireland Sage Treasury Company Limited*


United Kingdom

Sage Pay (GB) Limited


United Kingdom

Sage Treasury Ireland Unlimited Company


Ireland

Sage Pay (Pty) Ltd Netcash Square, 64 Parklands Main Road, Cape Town, 7441, South Africa

South Africa Sage US LLP North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage Pay Europe Limited


United Kingdom

Sage USD Hedgeco 1 North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage Pay GmbH Emil-von-Behring-Straße 8-14, 60439 Frankfurt am Main

Germany Sage USD Hedgeco 2 North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage Pay Ireland Limited


Ireland Sage Whitley Limited North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage Pay S.L.U. C/ Labastida, 10-12 28034, Madrid, Spain Spain Sage XRT Brasil Ltda Rua Leopoldo Couto Magalhães Junior, 146, 10th, floor, Itaim Bibi, São Paulo, São Paulo, Postal, Code 04542-000

Brazil

Sage Payments (UK) Ltd.


United Kingdom

Sagesoft North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage People Limited North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Snowdrop Systems Limited


United Kingdom

Sage People, Inc. 271 17th Street NW, Suite 1100 Atlanta, Georgia 30363

United States Snowdrop Systems Pty Ltd


Australia

Sage Portugal – Software, S.A.

Edifício Olympus II, Av. Dom Afonso Henriques 1462, 4450, Matosinhos, Portugal

Portugal Softline Australia Holdings Pty Ltd


Australia

Sage S.A. Rue Natalis 2, 4020 Liège, Belgium Belgium Softline Holdings USA, Inc.

6561 Irvine Centre Drive, Irvine, California, 92618

United States

Sage SAS Atrium Defense, Paris la Defense, 10 Place de Belgique, 92250, Le Garenne Colombes, Paris

France Softline Software Holdings Limited


Ireland

Sage Schweiz AG Platz 10, Root D4, CH-6039, Switzerland Switzerland Softline Software Limited


Ireland

Sage Services GmbH Karl-Heine-Straße 109-111, 04229, Leipzig Germany Softline Software USA, LLC


United States

Sage Singapore Holdings Pte. Ltd.

8 Commonwealth Lane, #04-01 Grande Building, Singapore 149555

Singapore Softline Software, Inc. 6561 Irvine Centre Drive, Irvine, California, 92618

United States

Sage Software Tour Crystal 1, Niveau 9, Bd Sidi Mohammed Ben Abdellah, Casablanca, 20030, Morocco

Morocco Sytax Sistemas S.A. Rua Antonio Nagib Ibrahim, 350, part B, PostalCode 05036-60, in the city of São Paulo, State of São Paulo

Brazil

Sage Software Asia Pte. Limited


Singapore TAS Software Limited Number One Central Park, Leopardstown, Dublin 18, Ireland

Ireland

Sage Software Australia Pty Ltd


Australia TAS Software Limited North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage Software Botswana (Proprietary) Limited

Plot 50371 Fairground Office, Park, Gaborone

Botswana Tetra Limited* North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage Software Canada Holdings Ltd.

300 Bay Street, Suite 400, Toronto, Ontario M5H 2R2

Canada Tonwomp Unlimited Company


Ireland

Sage Software Canada Ltd.


Canada Ulysoft Immeuble Mélika, rez de chausse, rue Lac Windermere, Berges du Lac, 1053

Tunisia

* Direct subsidiary



Contents Company financial statements


Company financial statements Company balance sheet 178 Company statement of changes in equity 179 Company accounting policies 180

Notes to the Company financial statementsSupplementary notes to the Company financial statements. 1. Dividends 182 2. Fixed assets: investments 182 3. Cash at bank and in hand 182 4. Debtors 182 5. Creditors: amounts falling due within one year 183 6. Obligations under operating leases 183 7. Equity 184



18 Group undertakings continued Name Registered address Country Name Registered address CountrySage Overseas Limited.


United Kingdom

Sage Technologies Limited


Ireland

Sage Pay (Dublin) Limited


Ireland Sage Treasury Company Limited*


United Kingdom

Sage Pay (GB) Limited


United Kingdom

Sage Treasury Ireland Unlimited Company


Ireland

Sage Pay (Pty) Ltd Netcash Square, 64 Parklands Main Road, Cape Town, 7441, South Africa

South Africa Sage US LLP North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage Pay Europe Limited


United Kingdom

Sage USD Hedgeco 1 North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage Pay GmbH Emil-von-Behring-Straße 8-14, 60439 Frankfurt am Main

Germany Sage USD Hedgeco 2 North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage Pay Ireland Limited


Ireland Sage Whitley Limited North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage Pay S.L.U. C/ Labastida, 10-12 28034, Madrid, Spain Spain Sage XRT Brasil Ltda Rua Leopoldo Couto Magalhães Junior, 146, 10th, floor, Itaim Bibi, São Paulo, São Paulo, Postal, Code 04542-000

Brazil

Sage Payments (UK) Ltd.


United Kingdom

Sagesoft North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage People Limited North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Snowdrop Systems Limited


United Kingdom

Sage People, Inc. 271 17th Street NW, Suite 1100 Atlanta, Georgia 30363

United States Snowdrop Systems Pty Ltd


Australia

Sage Portugal – Software, S.A.

Edifício Olympus II, Av. Dom Afonso Henriques 1462, 4450, Matosinhos, Portugal

Portugal Softline Australia Holdings Pty Ltd


Australia

Sage S.A. Rue Natalis 2, 4020 Liège, Belgium Belgium Softline Holdings USA, Inc.


United States

Sage SAS Atrium Defense, Paris la Defense, 10 Place de Belgique, 92250, Le Garenne Colombes, Paris

France Softline Software Holdings Limited


Ireland

Sage Schweiz AG Platz 10, Root D4, CH-6039, Switzerland Switzerland Softline Software Limited


Ireland

Sage Services GmbH Karl-Heine-Straße 109-111, 04229, Leipzig Germany Softline Software USA, LLC


United States

Sage Singapore Holdings Pte. Ltd.


Singapore Softline Software, Inc. 6561 Irvine Centre Drive, Irvine, California, 92618

United States

Sage Software Tour Crystal 1, Niveau 9, Bd Sidi Mohammed Ben Abdellah, Casablanca, 20030, Morocco

Morocco Sytax Sistemas S.A. Rua Antonio Nagib Ibrahim, 350, part B, PostalCode 05036-60, in the city of São Paulo, State of São Paulo

Brazil

Sage Software Asia Pte. Limited


Singapore TAS Software Limited Number One Central Park, Leopardstown, Dublin 18, Ireland

Ireland

Sage Software Australia Pty Ltd


Australia TAS Software Limited North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage Software Botswana (Proprietary) Limited

Plot 50371 Fairground Office, Park, Gaborone

Botswana Tetra Limited* North Park, Newcastle upon Tyne, NE13 9AA

United Kingdom

Sage Software Canada Holdings Ltd.


Canada Tonwomp Unlimited Company


Ireland

Sage Software Canada Ltd.


Canada Ulysoft Immeuble Mélika, rez de chausse, rue Lac Windermere, Berges du Lac, 1053

Tunisia

* Direct subsidiary

ContentsCompany financial statements


Strategic reportG


ents

Company balance sheet At 30 September 2017


Note 2017

£m2016 £m

Fixed assets: investments 2 3,088 3,088 Current assets Cash at bank and in hand 3 1 1Debtors – amounts due greater than one year £353m (2016: £349m) 4 968 796 969 797 Creditors: amounts falling due within one year Trade and other payables 5 (1,088) (1,015)

Net current liabilities (119) (218) Total assets less current liabilities 2,969 2,870 Net assets 2,969 2,870 Capital and reserves Called up share capital 7.1 12 12Share premium account 548 544Other reserves 7.2 (107) (101)Profit and loss account 2,516 2,415Total shareholders’ funds 2,969 2,870

The Company’s profit for the year was £229m (2016: £136m).

The financial statements on pages 178 to 184 were approved by the Board of Directors on 21 November 2017 and are signed on their behalf by:


Company balance sheetAt 30 September 2017


Company statement of changes in equity


Attributable to owners of the parentCalled up share

capital £m

Share premium

£m

Other reserves

£m

Profit and loss account

£m

Totalequity

£m

At 1 October 2016 12 544 (101) 2,415 2,870Profit for the year – – – 229 229Total comprehensive income for the year ended 30 September 2017 – – – 229 229Transactions with owners: Employee share option scheme: – Proceeds from shares issued – 4 – – 4– Value of employee services,

net of deferred tax – – – 11 11– Value of employee services on acquisition – – – 21 21Utilisation of treasury shares – – 3 (3) –Purchase of treasury shares – – (9) – (9)Dividends paid to owners of the parent – – – (157) (157)Total transactions with owners for the year ended 30 September 2017 – 4 (6) (128) (130)At 30 September 2017 12 548 (107) 2,516 2,969

Attributable to owners of the parentCalled up share

capital £m

Share premium

£m

Other reserves

£m

Profit and loss account

£m

Totalequity

£m

At 1 October 2015 12 541 (102) 2,419 2,870Profit for the year – – – 136 136Total comprehensive income for the year ended 30 September 2016 – – – 136 136Transactions with owners: Employee share option scheme: – Proceeds from shares issued – 3 – – 3– Value of employee services,

net of deferred tax – – – 8 8Utilisation of treasury shares – – 3 (3) –Purchase of treasury shares – – (2) – (2)Dividends paid to owners of the parent – – – (145) (145)Total transactions with owners for the year ended 30 September 2016 – 3 1 (140) (136)At 30 September 2016 12 544 (101) 2,415 2,870

Company balance sheet At 30 September 2017


Note 2017

£m2016 £m

Fixed assets: investments 2 3,088 3,088 Current assets Cash at bank and in hand 3 1 1Debtors – amounts due greater than one year £353m (2016: £349m) 4 968 796 969 797 Creditors: amounts falling due within one year Trade and other payables 5 (1,088) (1,015)

Net current liabilities (119) (218) Total assets less current liabilities 2,969 2,870 Net assets 2,969 2,870 Capital and reserves Called up share capital 7.1 12 12Share premium account 548 544Other reserves 7.2 (107) (101)Profit and loss account 2,516 2,415Total shareholders’ funds 2,969 2,870

The Company’s profit for the year was £229m (2016: £136m).

The financial statements on pages 178 to 184 were approved by the Board of Directors on 21 November 2017 and are signed on their behalf by:


Company statement of changes in equity


Strategic reportG


ents

Company accounting policies


Company accounting policies Statement of compliance These financial statements were prepared in accordance with Financial Reporting Standard 102 (FRS 102) “The Financial Reporting Standard applicable in the UK and Republic of Ireland”.

Basis of accounting These financial statements are prepared on the going concern basis, under the historical cost convention, and in accordance with the Companies Act 2006. A summary of the more important Company accounting policies, which have been consistently applied, is set out below. These accounting policies have been consistently applied to all periods presented.

The Company is deemed a qualifying entity under FRS102, and so may take advantage of the reduced disclosures permitted under the standard. As a result, the following disclosures have not been provided:

– a statement of cash flows and related disclosures under Section 7 Statement of Cash Flows and Section 3 Financial Statement Presentation paragraph 3.17(d);

– disclosures about financial instruments under Section 11 Basic Financial Instruments paragraphs 11.41(b), 11.41(c), 11.41(e), 11.41(f), 11.42, 11.44, 11.45, 11.47, 11.48(a)(iii), 11.48(a)(iv), 11.48(b) and 11.48(c) and Section 12 Other Financial Instruments Issues paragraphs 12.26 (in relation to those cross-referenced paragraphs from which a disclosure exemption is available), 12.27, 12.29(a), 12.29(b), and 12.29A; this exemption is permitted as equivalent disclosures are included in the consolidated financial statements of The Sage Group plc;

– disclosures about share-based payments under Section 26 Share-based Payment paragraphs 26.18(b), 26.19 to 26.21 and 26.23; this exemption is permitted as the Company is an ultimate parent, the share-based payment arrangements concern its own equity instruments, its separate financial statements are presented alongside the consolidated financial statements of The Sage Group plc and equivalent disclosures are included in those consolidated financial statements; and

– key management personnel compensation in total under Section 33 Related Party Disclosures paragraph 33.7.

Foreign currencies Monetary assets and liabilities expressed in foreign currencies are translated into sterling at rates of exchange prevailing at the balance sheet date. Transactions in foreign currencies are converted into sterling at the rate prevailing at the dates of the transactions. All differences on exchange are taken to the profit and loss account.

Investments Fixed asset investments are stated at cost less provision for any diminution in value. Any impairment is charged to the profit and loss account as it arises.

Parent Company profit and loss account No profit and loss account is presented for the Company as permitted by section 408 of the Companies Act 2006.

Details of the average number of people employed by the parent Company and the staff costs incurred by the Company are as follows. Average monthly number of people employed (including directors)

2017 number

2016 number

By segment: Northern Europe 305 194

Staff costs (including directors on service contracts) 2017

£m2016 £m

Wages and salaries 10 9Social security costs 1 1Post-employment benefits – –Share-based payments 3 3 14 13

Staff costs are net of recharges to other Group companies.

Auditors’ remuneration The audit fees payable in relation to the audit of the financial statements of the Company are £30,000 (2016: £30,000).

Directors’ remuneration Details of the remuneration of Executive and Non-Executive Directors and their interest in shares and options of the Company are given in the audited part of the Directors’ Remuneration Report on pages 84 to 103.

Share-based payments The Company issues equity-settled share-based payments to certain employees and employees of its subsidiaries. Equity-settled share-based payments granted to employees of the Company are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of the shares that will eventually vest allowing for the effect of non market-based vesting conditions.

Fair value is measured using the Black-Scholes or the Monte Carlo pricing models. The expected life used in the model has been adjusted based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.





The Company also provides certain employees and employees of its subsidiaries with the ability to purchase the Company’s ordinary shares at a discount to the current market value at the date of the grant. For awards made to its own employees, the Company records an expense, based on its estimate of the discount related to shares expected to vest, on a straight-line basis over the vesting period.

At the end of each reporting period, the entity revises its estimates for the number of options expected to vest. It recognises the impact of the revision to original estimates, if any, in the profit and loss account, with a corresponding adjustment to equity.

For awards made to subsidiary employees, the fair value of awards made is recognised by the Company as an addition to the cost of investment in the employing subsidiary. Intergroup recharges to the employing subsidiary, up to the fair value of awards made to employees of that subsidiary, subsequently reverse the increase to the cost of investment.

The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.

Financial instruments The accounting policy of the Company for financial instruments is the same as that shown in the Group accounting policies. The Company is taking the exemption for financial instruments disclosure, because disclosures are provided under IFRS 7 ‘Financial Instruments: Disclosures’ in note 14 to the Group financial statements.

Dividends Dividends are recognised through equity when approved by the Company’s shareholders or on payment, whichever is earlier.



Company accounting policies Statement of compliance These financial statements were prepared in accordance with Financial Reporting Standard 102 (FRS 102) “The Financial Reporting Standard applicable in the UK and Republic of Ireland”.

Basis of accounting These financial statements are prepared on the going concern basis, under the historical cost convention, and in accordance with the Companies Act 2006. A summary of the more important Company accounting policies, which have been consistently applied, is set out below. These accounting policies have been consistently applied to all periods presented.

The Company is deemed a qualifying entity under FRS102, and so may take advantage of the reduced disclosures permitted under the standard. As a result, the following disclosures have not been provided:

– a statement of cash flows and related disclosures under Section 7 Statement of Cash Flows and Section 3 Financial Statement Presentation paragraph 3.17(d);

– disclosures about financial instruments under Section 11 Basic Financial Instruments paragraphs 11.41(b), 11.41(c), 11.41(e), 11.41(f), 11.42, 11.44, 11.45, 11.47, 11.48(a)(iii), 11.48(a)(iv), 11.48(b) and 11.48(c) and Section 12 Other Financial Instruments Issues paragraphs 12.26 (in relation to those cross-referenced paragraphs from which a disclosure exemption is available), 12.27, 12.29(a), 12.29(b), and 12.29A; this exemption is permitted as equivalent disclosures are included in the consolidated financial statements of The Sage Group plc;

– disclosures about share-based payments under Section 26 Share-based Payment paragraphs 26.18(b), 26.19 to 26.21 and 26.23; this exemption is permitted as the Company is an ultimate parent, the share-based payment arrangements concern its own equity instruments, its separate financial statements are presented alongside the consolidated financial statements of The Sage Group plc and equivalent disclosures are included in those consolidated financial statements; and

– key management personnel compensation in total under Section 33 Related Party Disclosures paragraph 33.7.

Foreign currencies Monetary assets and liabilities expressed in foreign currencies are translated into sterling at rates of exchange prevailing at the balance sheet date. Transactions in foreign currencies are converted into sterling at the rate prevailing at the dates of the transactions. All differences on exchange are taken to the profit and loss account.

Investments Fixed asset investments are stated at cost less provision for any diminution in value. Any impairment is charged to the profit and loss account as it arises.

Parent Company profit and loss account No profit and loss account is presented for the Company as permitted by section 408 of the Companies Act 2006.

Details of the average number of people employed by the parent Company and the staff costs incurred by the Company are as follows. Average monthly number of people employed (including directors)

2017 number

2016 number

By segment: Northern Europe 305 194

Staff costs (including directors on service contracts) 2017

£m2016 £m

Wages and salaries 10 9Social security costs 1 1Post-employment benefits – –Share-based payments 3 3 14 13

Staff costs are net of recharges to other Group companies.

Auditors’ remuneration The audit fees payable in relation to the audit of the financial statements of the Company are £30,000 (2016: £30,000).

Directors’ remuneration Details of the remuneration of Executive and Non-Executive Directors and their interest in shares and options of the Company are given in the audited part of the Directors’ Remuneration Report on pages 84 to 103.

Share-based payments The Company issues equity-settled share-based payments to certain employees and employees of its subsidiaries. Equity-settled share-based payments granted to employees of the Company are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of the shares that will eventually vest allowing for the effect of non market-based vesting conditions.

Fair value is measured using the Black-Scholes or the Monte Carlo pricing models. The expected life used in the model has been adjusted based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.


Strategic reportG


ents

Notes to the Company financial statements


1 Dividends

2017£m

2016 £m


In addition, the Directors are proposing a final dividend in respect of the financial year ended 30 September 2017 of 10.20p per share which will absorb an estimated £110m of shareholders’ funds. It will be paid on 2 March 2018 to shareholders who are on the register of members on 9 February 2018. These financial statements do not reflect this dividend payable. The distributable reserves of The Sage Group plc at 30 September 2017 amounted to £2,283m (2016: £2,188m). The Company’s distributable reserves support 13 times this annual dividend.

2 Fixed assets: investments Equity interests in subsidiary undertakings are as follows:

£m

Cost At 1 October 2016 3,224At 30 September 2017 3,224Provision for diminution in value At 1 October 2016 136At 30 September 2017 136Net book value At 30 September 2017 3,088At 30 September 2016 3,088

The Directors believe that the carrying value of the investments is supported by their underlying net assets.

Subsidiary undertakings, included in the Group financial statements for the year ended 30 September 2017, are shown in note 18 of the Group financial statements. All of these subsidiary undertakings are wholly-owned. All subsidiaries are engaged in the development, distribution and support of business management software and related products and services for small and medium-sized businesses.

All operating subsidiaries’ results are included in the Group financial statements. The accounting reference date of all subsidiaries is 30 September, except for Brazilian subsidiaries which have an accounting reference date of 31 December due to Brazilian statutory requirements.

3 Cash at bank and in hand

2017 £m

2016 £m

Cash at bank and in hand 1 1

4 Debtors

2017£m

2016 £m

Prepayments and accrued income 1 1Amounts owed by Group undertakings 967 795 968 796

Of amounts owed by Group undertakings £353m (2016: £349m) is due greater than one year, on which interest is charged at 4.2% and is repayable in full on 21 October 2023 but may be repaid, in whole or in part in advance of this date at the option of the borrower.




5 Creditors: amounts falling due within one year 2017

£m2016 £m

Bank loans and overdrafts – 3Amounts owed to Group undertakings 1,077 969Accruals and deferred income 11 4US senior bank loans – unsecured – 39 1,088 1,015

Included in loans above is £nil (2016: £39m) of unsecured external loans (after unamortised issue costs).

The Company has US$nil (2016: US$50.0m) (£nil, 2016: £39m) of US senior loan notes, which were issued into the US private placement market in 2010. These notes matured in 2017 and carried interest coupons of 5.15% (2016: 5.15%).

Amounts owed to Group undertakings are unsecured and attract a rate of interest of between 0.0% and 8.3% (2016: 0.0% and 8.3%).

6 Obligations under operating leases 2017 2016

Total future minimum lease payments under non-cancellable operating leases falling due for payment as follows:


and equipment £m


and equipment £m

Within one year 1 1Later than one year and less than five years 7 1After five years 5 – 13 2

The Company leases various offices under non-cancellable operating lease agreements. These leases have various terms, escalation clauses and renewal rights.



1 Dividends

2017£m

2016 £m


In addition, the Directors are proposing a final dividend in respect of the financial year ended 30 September 2017 of 10.20p per share which will absorb an estimated £110m of shareholders’ funds. It will be paid on 2 March 2018 to shareholders who are on the register of members on 9 February 2018. These financial statements do not reflect this dividend payable. The distributable reserves of The Sage Group plc at 30 September 2017 amounted to £2,283m (2016: £2,188m). The Company’s distributable reserves support 13 times this annual dividend.

2 Fixed assets: investments Equity interests in subsidiary undertakings are as follows:

£m

Cost At 1 October 2016 3,224At 30 September 2017 3,224Provision for diminution in value At 1 October 2016 136At 30 September 2017 136Net book value At 30 September 2017 3,088At 30 September 2016 3,088

The Directors believe that the carrying value of the investments is supported by their underlying net assets.

Subsidiary undertakings, included in the Group financial statements for the year ended 30 September 2017, are shown in note 18 of the Group financial statements. All of these subsidiary undertakings are wholly-owned. All subsidiaries are engaged in the development, distribution and support of business management software and related products and services for small and medium-sized businesses.

All operating subsidiaries’ results are included in the Group financial statements. The accounting reference date of all subsidiaries is 30 September, except for Brazilian subsidiaries which have an accounting reference date of 31 December due to Brazilian statutory requirements.

3 Cash at bank and in hand

2017 £m

2016 £m

Cash at bank and in hand 1 1

4 Debtors

2017£m

2016 £m

Prepayments and accrued income 1 1Amounts owed by Group undertakings 967 795 968 796

Of amounts owed by Group undertakings £353m (2016: £349m) is due greater than one year, on which interest is charged at 4.2% and is repayable in full on 21 October 2023 but may be repaid, in whole or in part in advance of this date at the option of the borrower.


Strategic reportG


ents

Notes to the Company financial statements continued


7 Equity 7.1 Called up share capital

Issued and fully paid ordinary share of 14/77 pence each 2017

shares 2017

£m 2016

shares2016 £m

At 1 October 1,119,480,363 12 1,118,298,748 12Proceeds from shares issued 1,157,758 – 1,181,615 –At 30 September 1,120,638,121 12 1,119,480,363 12

7.2 Other reserves

Treasury shares

£m

Merger reserve

£m

Capital redemption

reserve £m

Total other reserves

£m

At 1 October 2016 (164) 61 2 (101)Utilisation of treasury shares 3 – – 3Purchase of treasury shares (9) – – (9)At 30 September 2017 (170) 61 2 (107)

Treasury shares

£m

Merger reserve

£m

Capital redemption

reserve £m


£m


Treasury shares

Purchase of treasury shares Shares purchased under the Group’s buyback programme are not cancelled but are retained in issue and represent a deduction from equity attributable to owners of the parent. During the year the Company purchased nil shares (2016: nil) and gifted 1,019,166 shares (2016: nil) to the Employee Share Trust.


Employee Share Trust The Company holds treasury shares in a trust which was set up for the benefit of Group employees. The Trust purchases the Company’s shares in the market or is gifted them by the Company for use in connection with the Group’s share-based payments arrangements. The Trust holds 961,715 ordinary shares in the Company (2016: 1,016,311) at a cost of £6m (2016: £nil) and a nominal value of £nil (2016: £nil).





Glossary

Measure /Description Why we use it

UnderlyingPrior period underlying measures are retranslated at the current year exchange rates to neutralise the effect of currency fluctuations.

Underlying operating profit excludes:

Recurring items:

– Amortisation of acquired intangible assets and purchase price adjustments made to reduce deferred income arising on acquisitions;

– M&A activity-related items; – Fair value adjustments on non-debt-related financial instruments and foreign currency

movements on intercompany debt balances; and – Non-recurring items that management judge are one-off or non-operational.

Underlying profit before tax excludes:

– All the items above; and – Imputed interest; and – Fair value adjustments on debt-related financial instruments.

Underlying profit after tax and earnings per share excludes:

– All the items above net of tax.

Underlying measures allow management and investors to compare performance without the potentially distorting effects of foreign exchange movements, one-off items or non-operational items.

By including part-period contributions from acquisitions, discontinued operations, disposals and assets held for sale of standalone businesses in the current and/or prior periods, the impact of M&A decisions on earnings per share growth can be evaluated.

OrganicIn addition to the adjustments made for underlying measures, organic measures exclude the contribution from acquisitions, discontinued operations, disposals and assets held for sale of standalone businesses in the current and prior period. Acquisitions and disposals which occurred close to the start of the opening comparative period where the contribution impact would be immaterial are not adjusted.

Organic measures allow management and investors to understand the like-for-like performance of the business.

Underlying cash conversionUnderlying cash conversion is underlying cash flow from operating activities divided by underlying operating profit. Underlying cash flow from operating activities is statutory cash flow from operating activities less net capital expenditure and adjusted for movements on foreign exchange rates, and non-recurring cash items.

Underlying cash conversion informs management and investors about the cash operating cycle of the business and how efficiently operating profit is converted into cash.

Underlying (as reported)Where prior period underlying measures are included without retranslation at current period exchange rates, they are labelled as underlying (as reported).

This measure is used to report comparative figures for external reporting purposes where it would not be appropriate to retranslate. For instance, on the face of primary financial statements.

Underlying adjusted EPSThe underlying adjusted EPS excludes the impact of acquisitions and disposals. The underlying adjusted EPS measure allows

management and investors to compare performance without the distorting effects arising from acquisitions and disposals.

Processing revenueProcessing revenue is revenue earned from customers for the processing of payments or where Sage colleagues process our customers’ payroll.

Recurring revenueRecurring revenue is revenue earned from customers for the provision of a good or service, where risks and rewards are transferred to the customer over the term of a contract, with the customer being unable to continue to benefit from the full functionality of the good or service without ongoing payments. Recurring revenue includes both software subscription revenue and maintenance and service revenue.

Software subscription revenueSubscription revenue is revenue earned from customers for the provision of a good or service, where the risk and rewards are transferred to the customer over the term of a contract. In the event that the customer stops paying, they lose the legal right to use the software and the Company has the ability to restrict the use of the product or service. (Also known as ‘Pay to play’).

Software and software related services (“SSRS”)SSRS revenue is for goods or services where the entire benefit is passed to the customer at the point of delivery. It comprises revenue for software or upgrades sold on a perpetual license basis and software related services, including hardware sales, professional services and training.

Annual contract value (“ACV”)Annual contact value is the value of bookings that will be generated over the ensuing year under a given contract or contracts.

Annual recurring revenue (“ARR”)Annual recurring revenue is the value of all components of recurring revenue, annualised for the ensuing year.



7 Equity 7.1 Called up share capital

Issued and fully paid ordinary share of 14/77 pence each 2017

shares 2017

£m 2016

shares2016 £m

At 1 October 1,119,480,363 12 1,118,298,748 12Proceeds from shares issued 1,157,758 – 1,181,615 –At 30 September 1,120,638,121 12 1,119,480,363 12

7.2 Other reserves

Treasury shares

£m

Merger reserve

£m

Capital redemption

reserve £m


£m


Treasury shares

£m

Merger reserve

£m

Capital redemption

reserve £m


£m


Treasury shares

Purchase of treasury shares Shares purchased under the Group’s buyback programme are not cancelled but are retained in issue and represent a deduction from equity attributable to owners of the parent. During the year the Company purchased nil shares (2016: nil) and gifted 1,019,166 shares (2016: nil) to the Employee Share Trust.


Employee Share Trust The Company holds treasury shares in a trust which was set up for the benefit of Group employees. The Trust purchases the Company’s shares in the market or is gifted them by the Company for use in connection with the Group’s share-based payments arrangements. The Trust holds 961,715 ordinary shares in the Company (2016: 1,016,311) at a cost of £6m (2016: £nil) and a nominal value of £nil (2016: £nil).




Strategic reportG


ents

A&RCAudit and Risk Committee

AAMEAAfrica Australia Middle East Asia

AGMAnnual General Meeting

APIApplication Program Interface

ASBAnnualised Subscriber Base

C4LCustomer For Life

CAGRCompound Annual Growth Rate

CBCCustomer Business Centre

CDPCarbon Disclosure Project

CFOChief Financial Officer

CGUCash Generating Unit

CMDCapital Markets Day

CRCorporate Responsibility

CRMCustomer Relationship Management

DEFRADepartment for Environment, Food & Rural Affairs

DTRDisclosure Rules and Transparency Rules

EBITDAEarnings Before Interest Taxes Depreciation and Amortisation

EBTEmployee Benefit Trust

EPSEarnings Per Share

ERPEnterprise Resource Planning

ESOSExecutive Share Operating Scheme

EUEuropean Union

FCFFree Cash Flow

FY16Financial year ending 30 September 2016



G&AGeneral and Administrative

GACGlobal Accounting Core

GHGGreen House Gas

HRHuman Resources

HCMHuman Capital Management

IFRSInternational Financial Reporting Standards

ISVIndependent Software Vendor

KPIKey Performance Indicator

LSELondon Stock Exchange

LTIPLong Term Incentive Plan

NPS Net Promoter Score

PBTProfit Before Tax

PSPPerformance Share Plan

R&DResearch and Development

S&MSales and Marketing

SaaSSoftware as a Service

SSRSSoftware & Software Related Services

TSRTotal Shareholder Return

VSGMVision, Strategy, Goals, Measures

WRVSWomen’s Royal Voluntary Service

Glossary continued


The Sage Group PLC —

Annual Report and Accounts 2017

The Sage Group plc North Park, Newcastle upon Tyne, NE13 9AA.

Registered in England

Company number 2231246

Sage is the global market leader for technology that helps businesses of all sizes manage everything from money to people – whether they're a start-up, scale-up or enterprise. Our mission is to free Business Builders from the burden of administration, so they can spend more time doing what they love; because when Business Builders do well, we all do.

www.sage.com

Documents

2017 Annual Report Financial Statements - Sage US